Term life insurance: Optimize financial security for your loved ones
7 May 2025
5
Minutes
Katrin Straub
CEO at nextsure
The thought of one's own death is unpleasant, but ensuring the financial security of your loved ones cannot be postponed. A term life insurance policy can play a crucial role in closing financial gaps. Discover who needs this protection and when it becomes indispensable, as well as how to optimize it.
The topic in brief and concise terms
A term life insurance policy is particularly useful for main earners, young families, borrowers, and unmarried couples to fill financial gaps in the event of death.
The sum insured should amount to three to five times the gross annual income and cover the financial dependency of the survivors for the duration.
Contributions may be tax-deductible; the payout is income tax-free but may be subject to inheritance tax, where allowances and contract arrangements (e.g. cross arrangements) are relevant.
Fundamental Protection: Understanding the Core Aspects of Term Life Insurance
A term life insurance policy provides financial protection in the event of death. It pays a predefined sum to the surviving dependents if the insured person dies during the term of the contract. This coverage is particularly relevant for main earners and young families to close financial gaps. The insurance amount should be three to five times the gross annual income to cover ongoing expenses and any loans. Many underestimate that even low monthly premiums can offer a high level of coverage. A careful needs analysis is the first step towards the right term life insurance. Understanding these fundamentals makes choosing the appropriate coverage easier.
Target audiences in focus: When is term life insurance particularly recommended?
The necessity of a term life insurance policy strongly depends on individual life circumstances. For young families with children, it is often essential to secure the standard of living and the children's education in the event of a loss of income. Homebuyers with ongoing loans also benefit significantly since the insurance sum can be used to repay the loan, thus preserving the family home. Unmarried couples should also consider protection, as they are not legally entitled to a widow or widower's pension in the event of a partner's death. Self-employed individuals and entrepreneurs can use a term life insurance policy to secure their business's existence and their family's welfare. For single individuals without financial obligations to others, a term life insurance policy is generally not necessary. A thorough evaluation of personal circumstances reveals the individual need.
Practical Guide: Optimally Determine Sum Insured and Duration
The correct determination of the insurance sum and term is crucial for meaningful protection with a term life insurance policy. The insurance sum should be chosen so that it can replace the lost income for a period of at least three to five years. In the case of mortgage loans, the sum ideally reflects the outstanding debt. The term should be set so that the financial dependency of the survivors is covered, for example, until the children have completed their education or the mortgage is paid off. A rule of thumb is to choose the term up to the age of 60. A guaranteed insurability option allows the insurance sum to be adjusted at certain life events such as marriage or birth without a new health check. Careful calculation prevents underinsurance or overinsurance.
Here are some guidelines for choosing the insurance sum:
Couples without children: twice the annual gross income plus any loans.
Couples with young children: five times the annual gross income plus loans and education costs.
Single parents: five times the annual gross income plus loans and education costs.
Borrowers: At least the amount of the outstanding debt of the loan.
These considerations lead to adequate protection.
Cost-benefit analysis: Contributions and benefits examined in detail
The premiums for a term life insurance are dependent on several factors. These include the age of entry, health status, occupation, risky hobbies, the sum insured, and the term of the policy. Younger and healthier individuals typically pay lower premiums. A term life insurance policy for €100,000 can start at around ten euros per month for a healthy person. The benefit in the event of death, namely the payout of the agreed sum, far exceeds the costs and protects against existential financial hardships. A comparison of different providers is advisable to find the best value for money. Choosing a term life insurance policy is therefore an investment in the financial security of the survivors.
Expert knowledge: Optimizing tax aspects and contract design
Contributions to term life insurance can, under certain conditions, be claimed as other provident expenses for tax purposes. The maximum amount for employees is 1,900 euros, and for self-employed individuals, it is 2,800 euros per year. However, contributions to health and long-term care insurance often already exhaust this limit. In the event of a claim, the insurance payout is generally income tax-free. However, inheritance tax may apply, with exemptions that vary according to the degree of relationship. For spouses, for example, the exemption amount is 500,000 euros. Skillful contract design, such as cross-insurance for couples, can help avoid inheritance tax. In this arrangement, each partner takes out a policy on the life of the other and is simultaneously the policyholder and beneficiary. Advice on these details is recommended. Knowing these regulations enables tax-optimized provision.
Special cases and alternatives: When other solutions might be more appropriate
Although term life insurance is sensible for many groups of people, there are situations in which it is not the first choice. For single individuals without dependents and loans, taking out a policy is usually unnecessary. Those primarily looking to save capital for retirement should consider other products such as a private pension insurance, since RLV does not have a savings function and no payout occurs at the end of the contract if there is no death. A funeral insurance policy can be an alternative if the sole purpose is to cover funeral costs; however, the insurance sums are usually limited to about 15,000 euros. Carefully assess whether term life insurance meets your specific needs or if a combination or another product would be more suitable. Weighing personal goals leads to the right decision.
Expert tips for closing contracts: Avoiding pitfalls
When taking out a term life insurance policy, there are several important points to consider to ensure optimal protection. Taking out a policy early usually secures lower premiums, as the risk increases with age. Answer all health-related questions with complete honesty; false statements can lead to payment denial in the event of a claim. Look for an included guaranteed insurability option to adjust the coverage amount later without a new medical exam, for example, when a child is born or with a salary increase of over ten percent. Our expert tip: Compare not just prices, but also the terms and conditions, such as preliminary coverage provisions or options for payment difficulties. Comprehensive information beforehand is crucial. This approach ensures you have the best protection in the long run.
Important aspects in choosing a provider include:
The insurer's financial strength and reputation.
Flexibility of the contract terms (e.g., cancellation options, deferral possibilities).
The amount of guaranteed benefits compared to potential profit participation.
Clarity and comprehensibility of the policy terms.
Quality of customer service and advice.
These points will help you find the right provider.
nextsure: Your partner for tailored term life insurance
More useful links
The Gesamtverband der Deutschen Versicherungswirtschaft (GDV) provides current statistics and figures on the German life insurance sector for the year 2024.
On Statista, you will find comprehensive data and facts on the topic of life insurance in Germany.
The Statistische Bundesamt (Destatis) provides official data on mortality rates and life expectancy in Germany.
Detailed life tables, relevant for actuarial calculations, are also available from the Statistische Bundesamt (Destatis).
The Deutsche Bundesbank regularly publishes reports on financial stability, also shedding light on the situation of insurance companies.
The Federal Ministry of Finance provides information on tax aspects of retirement provision and pension taxation, which may also be relevant for term life insurance.
Information on causes of death in Germany can also be accessed from the Statistische Bundesamt (Destatis).
FAQ
Is a term life insurance also useful for young people?
Yes, a term life insurance policy can be very sensible, especially for young people when starting a family, taking out a mortgage, or wanting to secure their partner. Premiums are often cheaper at a young age.
What role does the health check play in the conclusion?
The health assessment is an important part of the process. Based on your health information, the insurer calculates your individual risk and determines the premium amount. Honest information is crucial for future benefit claims.
What is the difference between term life insurance and whole life insurance?
Term life insurance is solely for coverage in the event of death. Whole life insurance combines death coverage with a savings process for retirement provision but is usually more expensive.
Is inheritance tax applicable upon payout?
The payout amount may be subject to inheritance tax. However, there are allowances that depend on the degree of kinship (e.g. €500,000 for spouses). A smart contract design can minimise the tax burden.
What does "Nachversicherungsgarantie" mean?
A guaranteed increase option allows you to increase the sum insured at certain life events (e.g., marriage, birth of a child, salary increase) without a renewed health check.
How do I find the right insurance sum?
The insurance sum should cover financial obligations (loans, living expenses) and the needs of dependents (e.g., children's education). A common recommendation is three to five times the annual gross income.
