Life insurance: how does it work and why take out a policy?
Life insurance in Luxembourg is a pillar of wealth accumulation for residents and benefits from an advantageous tax framework. It allows you to:
- Build up long-term savings with flexibility and ease
- Prepare for retirement while benefiting from significant tax deductions
- Organise the transfer of your assets without direct inheritance tax
- Protect your loved ones financially in the event of unforeseen circumstances
This guide is intended for Luxembourg residents who wish to:
- Structure their savings in a tax-optimised manner
- Prepare for their children's future (education, projects)
- Build up a supplementary pension
- Organise their estate in advance
With one of the highest savings rates in Europe and favourable taxation for life insurance, Luxembourg offers a particularly favourable environment. Life insurance is naturally the structured savings solution of choice for Luxembourg households.
A life insurance policy is a contract based on the life of a person. It involves several parties:
- the insurer: who offers the policy and must pay out the value of the policy when it terminates or the insured person dies;
- the policyholder: the person who takes out the policy and pays the premium;
- the insured: the person on whose life the policy is based and on whose death the policy ends;
- the beneficiary: the person who receive the value of the policy when the insured dies or the policy ends.
Life insurance is based on a few simple principles:
- Payments: flexible or scheduled, depending on your situation.
- Investment vehicles: more or less dynamic, depending on your profile and objectives.
- Flexible term: life insurance is a long-term commitment, with no fixed maturity date.
- Availability of savings: the capital remains accessible, subject to certain conditions (for some policies, the term must be at least 10 years to qualify for tax deductions).
The objective is not short-term performance, but consistency with your life horizon.
The premium is paid by the policyholder. Depending on the choices offered by the insurance company, the premium may be paid in one of two ways:
- as a single premium at the start of the policy;
- as regular annual or monthly premiums, the frequency and amount of which are determined with the insurer when the policy is taken out.
When taking out the policy the policyholder fills in an “investor profile” questionnaire in order to determine the level of risk he is prepared to accept.
Depending on the result, the policyholder then has the choice between different funds in which the premium will be invested. These funds may be:
- guaranteed rate funds; or
- funds quoted on stock markets, the returns of which may go up as well as down.
The policyholder also chooses the beneficiary/ies of the policy, i.e. the person or persons to whom the value of the policy will be paid when the insured person dies.
It is possible to change the beneficiaries during the term of the contract to reflect any changes in family circumstances (birth, remarriage, etc.).
Depending on the alternatives offered by the insurance company, the policyholder may, during the life of the policy:
- make additional payments on his policy;
- make surrenders, i.e. may withdraw part of the sum invested if he needs cash;
- change the funds if there is a change in his risk profile;
- change the beneficiary selected when the policy was taken out.
A life insurance policy can serve several purposes:
Build up long-term savings
Life insurance allows you to save gradually, at your own pace:
- through regular or one-off payments,
- with no fixed amount required,
- and with a long-term view.
It is often used to:
- supplement your pension,
- finance a future project,
- build up a contingency fund.
Organise the transfer of your assets
Life insurance is also a tool for transferring assets.
It allows you to designate one or more beneficiaries and plan how your assets will be distributed in the event of your death.
This flexibility facilitates:
- asset organisation,
- protection of loved ones,
- a more structured approach to inheritance.
Common examples:
| Objective | Typical time frame | Suitable solution |
| Supplementary pension | 15-30 years |
Pension Plan (art. 111bis) |
| Financing children's education | 10-18 years |
Kid's Plan (art. 111) |
|
Building up a deposit for a property |
5-15 years |
Life Plan |
Life insurance policies are an extremely flexible products, which enable you:
-
to pass on capital to your family and friends;
-
to access to your assets, at any time, by making a surrender, if necessary;
-
to build up a lump sum with which to fund your projects (housing, retirement, etc.);
-
to make payments at any time;
-
to diversify your investments.
For Luxembourg residents, life insurance is a particularly attractive estate planning tool. Death benefits paid to the beneficiaries of a life insurance policy are not subject to inheritance tax for direct line beneficiaries (spouse, children, parents). This makes it an effective mechanism for passing on assets without increasing the tax burden on heirs.
Premiums paid under a life insurance contract benefit from tax deductions under certain conditions.
- Maximum deductible limits for premiums paid for life insurance contracts under article 111LIR.
| Taxpayer | Without spouse | With spouse |
| Without children |
672 euros |
1,344 euros |
| With 1 child |
1,344 euros |
2,016 euros |
| With 2 children |
2,016 euros |
2,688 euros |
| With 1 children |
2.688 euros |
3.360 euros |
| For each additional child |
+ 672 euros |
+ 672 euros |
- Maximum deductible limit for premiums paid for life insurance policies covered by article 111bis LIR: €4,500 per year and per taxpayer.
Prepare for your retirement with peace of mind and benefit from immediate tax deductions.
Finance your children's studies or projects with a savings life insurance policy.
Build your financial future by protecting your loved ones.
Life insurance and death insurance, although often mistaken for one another, serve different purposes. Life insurance is first and foremost a savings product, enabling you to build up capital for future projects or to supplement your pension. This capital can be passed on to the designated beneficiaries, providing an advantageous way of passing on assets.
Death insurance, on the other hand, is a form of provident insurance. Its main aim is to provide financial protection for the policyholder's next of kin in the event of death. This protection takes the form of a lump sum or annuity paid to the beneficiaries, guaranteeing immediate financial support.
In Luxembourg, there is no statutory maximum amount for premiums paid into a life insurance policy. So, in theory, you can invest unlimited amounts. However, each insurance company may set its own limits, particularly as regards minimum premiums or specific conditions for very large amounts.
There are, however, limits on the tax benefits associated with life insurance, such as tax deductions on premiums paid. For example, premiums paid into a life insurance policy may be deductible up to a certain annual limit. This limit may vary depending on your family situation.
We recommend that you consult your insurance company or agent for precise details tailored to your situation.
In Luxembourg, life insurance taxation offers significant advantages in terms of both premiums paid and payouts. With regard to the deductibility of premiums, Luxembourg residents can deduct life insurance premiums from their taxable income under certain conditions. For contracts covered by Article 111 of the LIR (Law on Income Tax), the deduction ceiling is €672 per member of the tax household, while for retirement savings contracts (Article 111bis of the LIR), the deduction can be up to €4,500 per year per taxpayer. These contracts must be taken out for a minimum term of 10 years in order to benefit from these tax advantages. Other life insurance contracts do not qualify for the premium deduction.
There are no legal restrictions in Luxembourg on the number of life insurance policies a policyholder can hold. You are free to take out multiple policies with the same insurer or to spread your policies across different companies.
This multi-policy approach offers strategic advantages. Each policy can serve a specific purpose: retirement savings, wealth transfer or protection against life's uncertainties.
In Luxembourg, there are three main types of life insurance:
- Death insurance: protects loved ones by paying out a lump sum in the event of the insured person's death.
- Savings insurance (or whole life insurance): allows you to save over the long term and recover the capital (with interest) at maturity or in the event of death.
- Combined insurance: combines savings and death cover, with the capital being paid out either at maturity or to the beneficiaries.
Some policies also offer specific tax advantages in Luxembourg, particularly through life insurance contracts linked to investment funds.
Text originally published in May 2021 and updated in February 2026.