A PEL Home Savings Plan or life insurance: which should you choose?

Why choose life insurance?

Life insurance is a 'Swiss Army knife' of savings, providing financial protection for yourself or your loved ones. Here are two examples of the many possibilities offered by this savings product.

Annabelle is Belgian. She lives in Luxembourg and works in a consultancy firm. When her daughter was born, she and her partner wanted to set up a savings solution that would provide a capital sum for their daughter when she came of age - to help her continue her studies or set up home for the first time - but also to protect her in the event of a bump in the road.

"My first instinct was to open a traditional savings account, but the returns weren't very attractive. You get back the money invested, but nothing more. So I turned to my insurer. He advised us to take out life insurance. By saving €120 a month, my daughter will have a guaranteed sum of money when she turns 18, or even earlier if something were to happen to me.”

Thomas is French. When he moved to Luxembourg a few years ago, he took the opportunity to build up a savings portfolio based on various life insurance products.

"I had a small financial reserve in a dormant account when I arrived. I quickly heard about the advantages of life insurance products in Luxembourg and thought it might be a good idea for me and my partner. I opened several to meet different objectives: to take advantage of a better return, to protect my loved ones in the event of my death, and to build up additional income for my retirement.?>??

What are the advantages of life insurance?

• Higher returns than savings accounts (depending on the risk profile chosen)
• Profit sharing (depending on the product)
• The option of choosing a capital guarantee
• Contributions are tax-deductible
• The capital paid in is known from the start of the policy.

What are the limits of life insurance?

With life insurance, you are obliged to honour the payments defined in advance. Of course, you can always adapt the policy to suspend payments, but this means recalculating the capital that will be paid out at term.

What are the maximum tax-deductible amounts for life insurance?

Just like the home savings plan, life insurance also falls fully within the framework of ‘special expenses’ (Article 111 L.I.R.) on the Luxembourg income tax return. This deduction mainly applies to taxpayers resident in Luxembourg (or assimilated non-residents opting for the joint taxation regime). In practice, your savings effort is reflected directly in your annual tax return on the page dedicated to special expenses.

Unlike the home savings plan, whose use is strictly property-related, life insurance premiums give you a tax deduction while preserving complete freedom over how the capital is used in the future, making it suitable for all your long-term wealth planning strategies.

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Why opt for a home savings plan?

The Home Savings Plan in Luxembourg operates according to a very specific institutional mechanism, structured around two distinct phases. The first phase, known as the savings phase, allows you to gradually build up a personal contribution while benefiting from stable interest rates. In return for these regular contributions, the saver unlocks the second phase: the right to a loan. This mechanism guarantees you access to a mortgage loan at a fixed interest rate known from the moment the contract is signed. This right to a loan acts as a safeguard against fluctuations in the financial market, thereby securing the financing of your future purchase or property renovation projects.

What are the advantages of a PEL?

• It's a safe and secure way to save
• Amounts paid are deductible from taxable income
• Interest is tax-free
• The credit is insured at the end of the defined period, at a rate known in advance
• Payments can vary and be adjusted according to means

What are the limits of the PEL?

Although the home savings plan is a powerful savings tool, it is subject to significant regulatory and contractual constraints. The main limitation lies in the mandatory allocation of the funds, which must be used exclusively for a main residence project (purchase, construction or renovation). In addition, depending on the financial institution chosen, the geographical scope of the loan may vary: while some solutions only allow financing in Luxembourg, other providers extend the loan entitlement to Germany or neighbouring countries. These specific geographical conditions must be checked carefully in the contract before you commit.

What are the maximum tax-deductible amounts for a home savings plan?

The home savings plan is also eligible for tax relief. And if you're under 40, these amounts are doubled, so make the most of it!