Unit-linked endowment insurance: Cleverly managing return opportunities and risks
16 Jun 2025
3
Minutes
Katrin Straub
CEO at nextsure
Are you looking for a way to harness the return potential of the capital market for your retirement planning while also integrating life insurance coverage? A unit-linked endowment insurance policy could be the answer. This article highlights opportunities, risks, and provides you with concrete recommendations for action.
The topic in brief and concise terms
Unit-linked life insurance policies combine the profit opportunities of funds with death protection, but also carry market risks.
The cost structure (conclusion, administration, fund costs) significantly affects the net return and must be examined closely. [2,__7_4]
Tax advantages may be possible, especially with old contracts (before 2005) or when fulfilling the 12/62 rule for new contracts. [__2_3,__2_4]
Understanding the basics of unit-linked life insurance
A unit-linked life insurance is a type of life insurance where your savings contributions are invested in mutual funds. It offers a payout upon maturity that depends on the performance of the selected funds, and in the event of death, a guaranteed sum for your beneficiaries. The selection of funds can vary depending on the provider, with equity, bond, or real estate funds often available. [1,__1_2] It is important to carefully review the cost structure, as initial and administrative costs can reduce the returns. [2,__7_4] A typical term is often twenty to thirty years. [__1_3] This form of investment thus combines the desire for returns with the need for security.
Analyse potential returns and risk profile
The unit-linked endowment insurance attracts with potentially higher returns than classic policies, as it participates in the development of the capital markets. [__1_2,__3_2] Historically, investors with a long investment horizon of, for example, fifteen or thirty years, have often been able to benefit from positive market developments. [__3_2] However, there is no guaranteed interest on the fund share; you, as the policyholder, bear the market risk. [__1_2,__6_5] In the worst-case scenario, losses up to the total loss of the capital invested in the funds are possible if stock prices fall or funds are dissolved. [__1_3] Careful selection of funds and risk diversification are therefore crucial for investment success. A classical endowment policy, on the other hand, invests more conservatively. [__1_5]
The cost structure is another important point. These typically consist of:
Initial and distribution costs: These are often incurred in the first five years. [__3_3,__7_2]
Insurance administration costs: These are incurred annually for contract management. [__3_3]
Fund costs: Each fund incurs its own ongoing costs, often indicated as the Total Expense Ratio (TER), for example, 0.2 percent of the fund volume. [__3_1,__7_1]
Risk costs: Contributions for death cover. [__7_3]
These costs can significantly affect the net return. A careful look at the product information sheet is essential.
Consider tax aspects when concluding contracts and making payments
The tax treatment of a unit-linked life insurance policy significantly depends on the date of contract conclusion. [__2_2,__2_3] For contracts concluded before the first of January 2005, the earnings are generally tax-free if certain conditions are met. [__2_3,__2_5] These include a minimum term of twelve years and premium payments over at least five years. [__2_3] For contracts from 2005 onwards, the earnings are subject to capital gains tax or the personal income tax rate. [__2_3,__2_4] Under certain conditions, such as a term of at least twelve years and payout from the age of 62 (for contracts concluded from 2012), only half of the earnings are taxable (half-income procedure). [__2_4,__2_5] The contributions themselves are usually not deductible as special expenses unless they are certified Riester or Rürup contracts. [__2_2] More information on the calculation of life insurance tax can be found in our portal.
Contract options: review termination, sale, or contribution exemption
If your circumstances change, there are several options for your unit-linked endowment policy. Cancellation is possible at any time at the end of the insurance period but often leads to financial disadvantages. [__4_2] The surrender value usually falls below the paid-in premiums, particularly in the early years due to the deduction of initial and distribution costs. [__4_2,__4_3] An alternative can be the sale of the policy to specialized purchasing companies. [__4_3,__4_4] These may pay more than the pure surrender value, especially for older policies with attractive terms. [__4_4] Another option is premium exemption, where you no longer pay contributions, but the contract continues with reduced insurance cover and the capital accumulated so far. [__4_3,__4_5] Carefully weigh the pros and cons of each option before making a decision.
Here is an overview of the main options:
Cancellation: Payment of surrender value, often associated with losses. [__4_2]
Sale: Potentially higher proceeds compared to cancellation, especially for older policies. [__4_4]
Premium exemption: No further premium payments, contract continues on a reduced basis. [__4_3]
Revocation: Possibly possible if the revocation instructions were flawed; can lead to repayment of all premiums plus interest. [__4_3,__5_2]
Expert review can provide clarity here.
Expert tips for unit-linked life insurance
Before taking out a unit-linked endowment insurance policy, you should clearly define your risk appetite and investment goals. [__6_1,__6_2] Compare offerings from different insurers and pay attention to the total expense ratio (effective costs). [__3_5] This figure indicates how much the costs reduce the return. [__3_5] Our expert tip: Choose funds with a transparent investment strategy and as low ongoing costs (TER) as possible, for example, below one percent. [__3_3] Find out about the possibility of free fund switches during the term. [__7_3] If you have uncertainties regarding the tax deductibility or contract design, professional advice is advisable. Remember that the Federal Court of Justice has strengthened the rights of policyholders regarding improper cancellation notices, which can offer options even years after the contract has been concluded. [__5_2]
Distinction from Traditional Endowment Insurance
The main difference from the traditional endowment life insurance lies in the type of capital investment and the associated risk-return profile. Classical policies primarily invest in fixed-interest securities and offer a guaranteed minimum interest, leading to lower but safer returns. The unit-linked variant invests in funds and does not offer a guarantee on the fund's return, but it does provide higher return potential with increased risk. With unit-linked life insurance, the policyholder bears the full market risk. The traditional variant is suitable for security-oriented investors, while the unit-linked policy appeals to more risk-tolerant individuals who are willing to accept possible losses for higher return opportunities. The choice therefore depends greatly on your individual risk appetite and financial goals.
Who is the unit-linked endowment insurance suitable for?
A unit-linked life insurance policy is particularly interesting for individuals who wish to save for retirement over a long term, for example, twenty years or more. [__1_3,__8_1] You should be willing to accept the risk of value fluctuations in exchange for the potential of higher returns. [__1_2,__6_5] Basic knowledge of capital markets and funds is beneficial but not absolutely necessary if good advice is provided. It is important that this form of investment does not represent the only pillar of retirement provision but serves as a supplement. [__1_3] Individuals who value guaranteed payouts and wish to avoid price fluctuations are often better advised with a traditional pension or life insurance. [__1_5] The integration of death protection also makes them attractive to family providers. An individual analysis of your situation is crucial.
Conclusion and Next Steps for Individual Protection
More useful links
GDV offers statistics and figures on German life insurance for the year 2024.
Verbraucherzentrale Niedersachsen provides comprehensive information about unit-linked life insurance.
Statistisches Bundesamt (Destatis) publishes a press release featuring the 'number of the week' on the topic of life insurance.
Deutsche Bundesbank provides statistics on insurance companies.
Bundesfinanzministerium delivers information on the tax treatment of life insurance.
PwC has published a study on asset-liability management for insurance companies in 2024.
KPMG offers an article that highlights the difference between unit-linked life insurance and pure capital investment.
ifo Institut has produced a publication on the focus theme of life insurances in Germany (published 2002).
FAQ
Who is a unit-linked endowment insurance suitable for?
It is suitable for long-term oriented investors (at least 15-20 years) who are willing to bear capital market risks for higher return opportunities and also wish to have death protection. [__1_3,__6_1]
What return can I expect?
The return is not guaranteed and depends on the performance of the chosen funds. It can be higher than that of traditional life insurance, but may also be negative. [__1_2,__3_2]
What happens in the event of death?
In the event of death, a pre-agreed insurance sum is usually paid out to the beneficiaries.
Can I switch the funds during the term?
Many providers allow one or more free or paid fund switches during the contract term. [1,__7_3]
Are my contributions tax-deductible?
Contributions to a unit-linked endowment life insurance policy are generally not tax-deductible as special expenses, unless it is a certified Riester or Rürup contract. [__2_2]
What is the surrender value?
The surrender value is the amount you receive from the insurance if you terminate your policy early. It corresponds to the current value of the fund units, minus cancellation fees and charges. [__4_2]
