Making endowment life insurance premium-free: Strategies for premium optimisation and contract maintenance
30 Apr 2025
10
Minutes
Katrin Straub
CEO at nextsure
Are you faced with the decision to make your endowment life insurance premium-free? This option can provide financial relief but also carries pitfalls. Learn how to proceed wisely and explore the alternatives available.
The topic in brief and concise terms
Making an endowment life insurance policy contribution-free means no longer paying premiums, while the policy continues with reduced capital and the maturity benefit decreases.
Before opting for premium exemption, alternatives such as premium deferral, premium reduction, or payment from surpluses should be considered.
The suspension of contributions must be requested in writing and may result in tax disadvantages as well as the loss of additional benefits.
Understanding contribution exemption: Basics and first steps
When you make your endowment life insurance premium-free, you stop the ongoing premium payments. Your policy continues with the capital accumulated up to that point, leading to a reduced insurance sum at maturity. This is generally possible once a minimum insurance sum is reached, often after two to three years of duration. Note that administrative costs still apply and can erode the credit balance. Exemption from premiums must be communicated to the insurer in writing.
The decision to exempt premiums should be well-considered, as it directly affects the amount of your retirement provisions. Many underestimate the long-term effects on the maturity benefits. Carefully check your contract terms, particularly regarding the minimum sum and potential deadlines for resuming payments later. The Hamburg Consumer Centre advises seeking solutions with the insurer before adjusting contracts. This is the first step in setting the right course.
Practical Check: When is Contribution Exemption Really Worthwhile?
The exemption of contributions for a whole life insurance policy may be advantageous in certain situations, such as short-term financial difficulties. It allows for a reduction in monthly expenditure without completely cancelling the policy. An example: Max Mustermann pays in 100 euros monthly and after ten years has accumulated a fund of 12,000 euros. By exempting the policy from contributions, the 100-euro monthly instalment ceases, but the maturity benefit will be lower than originally predicted. The reduction in the maturity benefit can be significant.
However, the exemption from contributions is not always the best solution. Ongoing costs may reduce yield, and the insurance coverage, such as an integrated occupational disability insurance, may be reduced or entirely lost. For policies concluded before 2005, the exemption from contributions must not exceed two years to avoid jeopardising tax advantages. Therefore, a thorough examination of the terms of old contracts is essential. Carefully weigh up the advantages and disadvantages before taking action.
Exploring alternatives: Options beyond contribution suspension
Before making your endowment life insurance premium-free, you should consider at least three alternatives. One option is to defer the premiums, where you suspend payments for an agreed period and catch up later. This often maintains full insurance coverage, but may incur interest costs on the deferred premiums. A second option is to reduce the premiums, which lowers the sum insured but keeps the policy active.
A third alternative, especially with older policies that have already accumulated bonuses, is to pay the premiums from these bonuses. Here, the ongoing premiums are financed from the existing bonus account until it is exhausted. Although this reduces the non-guaranteed maturity benefit, it preserves the guaranteed amount. The choice of the right alternative depends greatly on your personal circumstances and the duration of the contract. Cancellation of the life insurance should always be the last option. You should clarify the exact conditions and implications of these alternatives with your insurer.
The Process of Contribution Exemption: A Clear Roadmap
The application for premium exemption of your endowment policy generally needs to be submitted in writing. Many insurers provide forms for this purpose or accept an informal letter. Important details include your contract number, personal data, and the desired time of exemption. Typically, the exemption becomes effective at the end of the current insurance period, often at the start of the next month for monthly payments.
The following steps are typically necessary:
Check the contract conditions for minimum balances and deadlines.
Request information from the insurer on the reduced maturity benefit and effects on ancillary insurances.
Submit a written application for premium exemption (via post or fax for better traceability).
Wait for confirmation from the insurer and check it carefully.
Careful documentation of the entire process is advisable. Keep in mind that a policy once set to premium-free status can often only be reinstated with the insurer's consent and possibly a renewed health check. This highlights the necessity of making a well-considered decision.
Expert Knowledge: Legal Aspects and Pitfalls in Contribution Exemption
The right to suspend a life insurance policy without contributions is anchored in paragraph 165 of the Insurance Contract Act (VVG). According to this, you can request the conversion into a premium-free insurance policy at the end of the current insurance period, provided a minimum insurance benefit is reached. If this is not achieved, the insurer will pay out the surrender value. The exact definition of the minimum benefit can be found in your contract documents.
An important aspect is the tax implications. For policies concluded before 1 January 2005, the contribution suspension must not last longer than two years to retain the tax privileges. For contracts concluded later, a period of three years often applies, and the contract must have existed for at least twelve years when it expires, with the insured person being at least 60 (or 62 if concluded after 2012) years old. Different rules apply to term life insurance. If in doubt, seek advice to avoid disadvantages.
Long-term effects and resumption of contributions
A premium exemption does not only reduce the maturity benefit of your endowment life insurance but can also diminish the death cover and benefits from additional insurance. The administration costs continue and erode the remaining capital, which can reduce the return over the years. With a very long remaining term, this effect can be significant. The decision to opt for a premium exemption should therefore never be taken lightly.
Resuming premium payments at a later date is not always straightforward. Often, the insurer's consent is required, and a renewed health examination may be demanded, especially when additional components such as disability insurance are involved. If your health condition has deteriorated, higher premiums or exclusions may result. It is essential to clarify the conditions for resuming payments in advance to remain flexible. This is an important consideration when pondering how to structure your life insurance.
Our expert tip: Proceed strategically and make use of advice
Before making your whole life insurance premium-free, we recommend a thorough analysis of your financial situation and your contract details. Compare the guaranteed maturity benefit if you continue paying premiums with the premium-free insurance amount. Also, consider the impact of inflation and the potential return on alternative investments for the saved premiums. It is often advisable, especially with older contracts with good guaranteed interest rates, to look for solutions other than a complete premium waiver.
Consider the following points in your deliberations:
How much will the maturity benefit actually be reduced?
Is the new insurance amount sufficient to meet your retirement goals?
Is a temporary deferral or premium reduction a better option?
What impact does the waiver have on important additional insurances?
Has the minimum insurance amount for the waiver been reached?
Can the contract be continued later without a new medical examination?
Independent advice can help you make the best decision for your individual situation. At nextsure, we are happy to assist you in evaluating your options. Carefully considering all factors is crucial for your financial security.
Conclusion: Contribution suspension as a well-considered option
More useful links
Wikipedia provides a comprehensive overview of life insurance in Germany.
The Consumer Advice Centre offers valuable tips on alternatives to cancelling a life insurance policy.
Destatis (Federal Statistical Office) provides the official definition of insurance assets.
The GDV (German Insurance Association) presents a publication with key figures on German life insurance for the year 2023.
The Federal Ministry of Finance provides information on the tax treatment of life insurance policies.
Gesetze im Internet (VVG 2008) offers the full text of the German Insurance Contract Act.
The Deutsche Bundesbank publishes the Financial Stability Report 2023.
The GDV (German Insurance Association) provides detailed statistics on life insurance in Germany.
The ifo Institute provides an older but relevant essay on the key topic of life insurance in Germany (published in 2002).
FAQ
How do I apply for the premium waiver of my endowment life insurance?
The exemption from contributions must be requested in writing from your insurer. Provide your contract number, personal details, and the desired date. Many insurers offer forms, but an informal letter is often sufficient.
What are the alternatives to contribution suspension?
Alternatives include deferring contributions (with later repayment), reducing the contribution amount (which leads to a lower insurance sum), or paying contributions from already accumulated surplus participations.
What are the tax implications of a contribution suspension?
For contracts before 2005, the exemption may often not last longer than two years, and for more recent contracts, no longer than three years, in order to obtain tax advantages (partial income procedure). Additionally, minimum terms and the end age must be observed.
Do I lose my death benefit protection if I take a premium holiday?
The death protection generally remains in place, but it is recalculated based on the lower capital and thus ends up being lower. Details are governed by your policy conditions.
Do the costs continue for a non-contributory endowment insurance?
Yes, administrative costs and possibly risk costs for certain contract components can still arise with a non-contributory contract and diminish the available capital.
Is a premium exemption possible with every endowment insurance?
In principle, yes, provided a contractually agreed minimum insurance sum has been reached. If this is not the case, the insurer may terminate the policy under certain circumstances and pay out the surrender value.
