Unit-linked whole life insurance: managing return opportunities and risks smartly
16.06.25
3
Minutes
Katrin Straub
Managing Director at nextsure
Are you looking for a way to harness the return opportunities of the capital markets for your retirement provision while also including death benefit protection? A unit-linked life insurance policy could be the answer. This article highlights the opportunities and risks and gives you specific recommendations for action.
The topic in brief and concise terms
Unit-linked whole life insurance policies combine the return opportunities of funds with life cover, but also carry market risks.
The cost structure (initial, administration and fund costs) has a significant impact on the net return and must be examined carefully. [2,__7_4]
Tax benefits may be possible, particularly for older contracts (before 2005) or if the 12/62 rule is met for new contracts. [__2_3,__2_4]
Understanding the basics of unit-linked endowment life insurance
A unit-linked life insurance policy is a form of life insurance in which your savings contributions are invested in investment funds. If you survive to the end of the term, it provides a payout that depends on the performance of the funds selected, and in the event of death, a guaranteed sum for your beneficiaries. The choice of funds can vary depending on the provider; equity, bond or property funds are often available. [1,__1_2] It is important to check the fee structure carefully, as initial and administration costs can reduce returns. [2,__7_4] A typical term is often twenty to thirty years. [__1_3] This form of investment therefore combines the desire for returns with the need for protection.
Analyse return opportunities and risk profile
Unit-linked whole life insurance offers potentially higher returns than traditional policies, as it participates in the performance of the capital markets. [__1_2,__3_2] Historically, investors with a long-term investment horizon of, for example, fifteen or thirty years have often benefited from positive market developments. [__3_2] However, there is no guaranteed interest on the fund portion; you as the policyholder bear the market risk. [__1_2,__6_5] Losses up to and including a total loss of the capital invested in funds are possible in the worst case if share prices fall or funds are liquidated. [__1_3] Careful selection of the funds and diversification are therefore crucial to investment success. A traditional whole life insurance policy invests more conservatively by contrast. [__1_5]
The cost structure is another important point. These typically consist of:
Initial and distribution costs: These are often due in the first five years. [__3_3,__7_2]
Insurance administration costs: These are incurred annually for policy administration. [__3_3]
Fund costs: Each fund incurs its own ongoing costs, often shown as Total Expense Ratio (TER), for example 0.2 per cent of the fund volume. [__3_1,__7_1]
Risk costs: Premiums for death benefit cover. [__7_3]
These costs can significantly affect the net return. A close look at the product information sheet is essential.
Consider tax aspects when concluding the contract and making the payment
The tax treatment of a unit-linked whole life insurance policy depends largely on the contract start date. [__2_2,__2_3] For contracts concluded before 1 January 2005, the returns are generally tax-free if certain conditions are met. [__2_3,__2_5] These include a minimum term of twelve years and premium payments for at least five years. [__2_3] For contracts from 2005 onwards, the returns are subject to the flat-rate withholding tax or the personal income tax rate. [__2_3,__2_4] Under certain conditions, such as a term of at least twelve years and a payout from age 62 (for contracts concluded from 2012), only half of the return is taxable (half-income method). [__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 on our portal.
Contract options: review cancellation, sale or premium-free status
If your circumstances change, there are several options for your unit-linked whole life insurance. Surrendering the policy is possible at any time at the end of the policy period, but often leads to financial disadvantages. [__4_2] The surrender value is often lower than the contributions paid in, especially in the first few years, as initial and distribution costs are deducted. [__4_2,__4_3] One alternative may be the sale of the policy to specialist buying companies. [__4_3,__4_4] They may pay more than the pure surrender value, especially for older policies with attractive terms. [__4_4] Another option is paid-up insurance, where you stop paying further premiums, but the policy continues with reduced cover and the capital accumulated to date. [__4_3,__4_5] Carefully weigh the pros and cons of each option before making a decision.
Here are the main options at a glance:
Surrender: payment of the surrender value, often associated with losses. [__4_2]
Sale: potentially higher proceeds than on surrender, particularly for older policies. [__4_4]
Paid-up insurance: no further premium payments, policy continues on a reduced basis. [__4_3]
Withdrawal: may be possible if the withdrawal notice was incorrect; can lead to repayment of all premiums plus interest. [__4_3,__5_2]
Expert review can bring clarity here.
Expert tips for unit-linked whole life insurance
Before taking out a unit-linked whole life insurance policy, you should clearly define your risk tolerance and investment objectives. [__6_1,__6_2] Compare offers from different insurers and pay attention to the total cost 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 the lowest possible ongoing costs (TER), for example under one percent. [__3_3] Find out about the possibility of free fund switches (switches) during the term. [__7_3] If you are unsure about tax deductibility or the contract structure, professional advice is worthwhile. Bear in mind that the Federal Court of Justice has strengthened policyholders' rights in cases of incorrect withdrawal notices, which can still open up options years after the contract was concluded. [__5_2]
Distinction from traditional endowment life insurance
The main difference compared with the traditional endowment life insurance policy lies in the way the capital is invested and the associated risk-return profile. [__1_5,__8_1] Traditional policies primarily invest in fixed-interest securities and offer a guaranteed minimum rate of return, resulting in lower but more secure returns. [__1_5,__8_1] The unit-linked variant invests in funds and offers no guaranteed return on the fund component, but does offer higher return potential with a correspondingly higher risk. [__1_2,__8_1] In unit-linked life insurance, the policyholder bears the capital market risk in full. [__8_2] The traditional variant is suitable for safety-oriented investors, while the unit-linked policy appeals to more risk-tolerant individuals who are prepared to accept possible losses in exchange for higher return potential. [__1_3,__6_2] The choice therefore depends heavily on your individual risk appetite and your financial goals.
A unit-linked endowment life insurance policy is particularly attractive for people who want to provide for retirement over the long term, for example over twenty years or more. [__1_3,__8_1] You should be prepared to accept the risk of fluctuations in value in return for the chance of higher returns. [__1_2,__6_5] Basic knowledge of capital markets and funds is an advantage, but not essential if you receive good advice. It is important that this type of investment does not form the sole pillar of retirement provision, but serves as a complementary addition. [__1_3] People who value guaranteed payouts and want to avoid market fluctuations are often better advised to take out a traditional pension or life insurance policy. [__1_5] The inclusion of death cover also makes it attractive for family breadwinners. An individual assessment of your situation is essential.
Conclusion and next steps for individual cover
Unit-linked whole-of-life insurance offers an interesting combination of opportunities for returns in the capital markets and dependants' protection. However, it requires a careful review of the costs, a realistic assessment of your own willingness to take risks, and a long-term perspective of at least fifteen to twenty years. [__1_3,__3_2] The flexibility in fund selection and possible tax advantages can be attractive, but they should not obscure the risks. [1,__2_3] Careful consideration and a comparison of different offers are essential before you decide for or against this product. If you are unsure whether a unit-linked insurance policy suits your financial situation and your goals, professional advice is the next logical step.
Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive concrete recommendations for optimisation.
More useful links
GDV provides statistics and figures on German life insurance from 2024.
Lower Saxony Consumer Advice Centre provides comprehensive information on unit-linked life insurance.
Federal Statistical Office (Destatis) publishes a press release with the 'Figure of the Week' on the topic of life insurance.
Deutsche Bundesbank provides statistics on insurance companies.
Federal Ministry of Finance provides information on the tax treatment of life insurance policies.
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 a pure investment product.
ifo Institute has produced a publication on the main topic of life insurance in Germany (published in 2002).
FAQ
Who is a unit-linked endowment life insurance policy suitable for?
It is suitable for long-term investors (at least 15-20 years) who are prepared to accept capital market risks for the chance of higher returns and who also want death benefit protection. [__1_3,__6_1]
What return can I expect?
Returns are not guaranteed and depend on the performance of the selected funds. They may be higher than with traditional life insurance policies, but they can also be negative. [__1_2,__3_2]
What happens in the event of death?
In the event of death, an agreed sum assured is usually paid out to the beneficiaries.
Can I switch funds during the term?
Many providers allow one or more free or paid fund switches (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 insurer if you cancel your policy early. It corresponds to the current value of the fund units less cancellation charges and costs. [__4_2]
