Optimising Endowment Life Insurance: Strategies for Existing Contracts and Alternatives
15 May 2025
9
Minutes
Katrin Straub
CEO at nextsure
Many Germans still have a term life insurance policy, but low interest rates raise questions about its profitability. Find out how to get the most out of your contract or discover smart alternatives for your financial future. This guide offers you well-founded insights and practical action recommendations.
The topic in brief and concise terms
Whole life insurance policies offer guarantees, but often only provide low returns due to low interest rates; a thorough contract review is essential.
Before terminating a contract, alternatives such as selling, contribution suspension, or particularly withdrawal (for contracts from 1994-2007) should be considered to minimize financial disadvantages.
The tax treatment of the payout depends on the contract date; modern alternatives such as term life insurance plus an ETF savings plan can be more flexible and yield higher returns.
Whole life insurance: Understanding the basics and evaluating return potential
The endowment life insurance combines a savings process with death protection. Part of your contributions goes towards building capital, earning interest at a guaranteed rate. Currently, this guaranteed rate for new contracts has been only one percent since the first of January 2025. Many older contracts often still show a higher guaranteed interest rate of up to four percent. The insurance sum is paid out either in the event of death or at the end of the contract period. This structure once made it popular, but times are changing. The declining profit participation negatively affects the overall return of many policies. A thorough analysis of your contract is therefore essential. This way, you can recognize the true potential of your policy.
Weighing up pros and cons: Is your policy still up to date?
One advantage of endowment life insurance is the guaranteed benefit in the event of death or survival. The guaranteed minimum interest rate provides a certain level of planning security for a portion of the capital. On the other hand, returns are often low due to low market interest rates. High premiums may be necessary to ensure adequate death coverage. Cancellation, especially in the first years of the contract, often poses the risk of financial losses. Making a capital life insurance policy non-contributory also reduces death coverage. Carefully weigh these points for your individual situation. The decision requires a clear understanding of the contract details.
Actions for existing contracts: Termination, sale or withdrawal?
Holders of a whole life insurance policy have several options when the contract no longer seems optimal. Cancelling the policy results in the payout of the surrender value, which is often less than the contributions paid, particularly with newer contracts. Selling the policy on the secondary market might get you slightly more than the surrender value. Another option is premium exemption, where no further contributions are made. Particularly interesting for contracts between 1994 and 2007 can be a revocation. If the revocation instructions were faulty, a revocation is often possible even years later and can be financially more advantageous. Expert review is advisable here. Each option has specific financial and contractual consequences.
Our expert tip: Have revocation reviewed
Before you cancel your whole life insurance policy, you should have the possibility of revocation reviewed. This is particularly true for contracts concluded between 1994 and 2007. Many insurers used faulty revocation instructions during this period. A successful revocation can lead to a refund of your paid premiums plus interest, which is often significantly more than the pure surrender value. The Consumer Centre NRW reports 30 to 40 percent more money with a revocation compared to a cancellation. An individual review by specialised lawyers or consumer protection organisations can provide clarity and secure financial advantages.
Tax aspects of endowment life insurance: What applies to payout and cancellation
The tax treatment of endowment life insurance policies depends on the contract's conclusion date. For contracts concluded before 1 January 2005, the returns are generally tax-free. This typically requires a term of at least twelve years and premium payments over at least five years. For contracts from 2005 onwards, the returns are subject to tax. Half of the returns are taxed at the personal income tax rate if the contract has run for at least twelve years and the payout occurs after the age of 60 (for contracts from 2012 onwards, after the age of 62). Otherwise, the full return is subject to the withholding tax of 25 percent plus solidarity surcharge and, if applicable, church tax. A calculation of the tax burden is complex. These regulations significantly affect the net payout. A thorough understanding of the tax implications is important for financial planning.
Case Study: Understanding Surrender Value and Avoiding Pitfalls
The surrender value is the amount you receive if you terminate your endowment insurance early. It is calculated from the premiums paid plus interest, minus various costs. These costs include acquisition and distribution costs, administrative costs, and often a surrender subtracted penalty. Especially in the first few years, the costs often exceed the earned returns. This can lead to the surrender value being lower than the sum of the premiums paid. An example: With a contract with €10,000 in premiums paid after five years, only €7,500 might remain as a surrender value after deducting €2,500 costs. Consumer protection advocates warn against premature cancellations due to possible high losses. Therefore, an endowment insurance should not be terminated without careful consideration. The exact composition of the surrender value can be found in the contract conditions or the annual statement.
Modern alternatives to endowment insurance: Flexible and with higher yields for better provision
In light of the drawbacks of traditional whole life insurance policies, many people are seeking better retirement solutions. A popular alternative is combining term life insurance with a separate savings plan. Term life insurance provides affordable protection for dependents. The saved capital can then be invested flexibly and potentially with higher returns, for example in ETF savings plans or unit-linked insurance policies. These offer higher return opportunities but are also associated with higher risks. The following points advocate for modern alternatives:
Separating risk protection and investment allows for more flexibility.
Premiums for risk protection are often lower than for whole life insurance.
Investments can be tailored to one's own risk tolerance.
Higher return potential through investments in the stock markets is possible.
Cancelling or adjusting one part (e.g., the savings plan) does not affect the other part (risk protection).
The choice of the suitable alternative strongly depends on individual financial goals and risk appetite. Thorough evaluation and advice are crucial here. This is how you can tailor your retirement planning and protection to be modern and appropriate to your needs.
Expert Tips for Your Whole Life Insurance: Harnessing Optimization Potential
To make the most of your endowment life insurance or to make informed decisions about its future, specific expert tips can be helpful. Review your policy at least once a year based on the annual statement. Pay attention to the guaranteed interest rate, surplus sharing, and cost structure. In financial difficulties, a premium holiday is often better than a hasty termination with losses. Consider a cancellation for older contracts with potentially incorrect withdrawal instructions. This can, as previously mentioned, yield up to 40 percent more returns than a termination. Always seek a second opinion if anything is unclear, for instance, from consumer advice centres or specialised consultants. Our expert tip: Carefully document all communication with your insurer. This can be invaluable in case of later discrepancies or legal actions. Proactively engaging with your policy secures your financial interests.
Legal framework and recent rulings: What policyholders need to know
nextsure: Your partner for transparent and optimized retirement planning
More useful links
Verbraucherzentrale offers consumer advice on alternatives to cancelling life insurance policies.
Destatis provides statistical data on life insurance in a press release.
Bundesbank offers statistics on insurance companies.
Deutsche Rentenversicherung provides information about the Riester pension.
Deutsche Rentenversicherung explains the Rürup pension.
Bundesfinanzministerium provides information on the tax aspects of life insurance.
Verbraucherzentrale informs about the right to perpetual objection for life and pension insurance policies.
FAQ
What is the difference between surrender value and cancellation?
The surrender value is the amount that the insurance pays upon a regular cancellation, often after deducting high costs. A revocation is only possible in case of faulty instruction and can lead to a refund of all contributions plus interest, which is usually more advantageous.
Can I make my endowment life insurance policy paid-up?
Yes, a contribution exemption is generally possible. You then no longer pay contributions, but the sum insured and the later payout are reduced. The death benefit may also decrease.
What is the current guaranteed interest rate for endowment life insurances?
For new contracts concluded since the first of January 2025, the statutory maximum actuarial interest rate (guaranteed interest rate) is one percent.
When is it possible to cancel my endowment life insurance policy?
A revocation is often still possible even after years if the revocation instruction at the time of contract conclusion was incorrect. This frequently relates to contracts concluded between 1994 and 2007.
What costs are associated with a whole life insurance?
Typical costs include initial and distribution costs (often charged in the first five years), ongoing management fees, and potentially costs for risk protection. These can significantly reduce returns.
Is whole life insurance still recommended for retirement provision?
Due to the low returns, it is often no longer the first choice for new retirement planning contracts. There are more flexible and potentially more lucrative alternatives.
