Endowment life insurance with disability insurance: optimise cover or avoid pitfalls?
15.06.25
8
Minutes
Katrin Straub
Managing Director at nextsure
The combination of capital accumulation and occupational disability cover sounds appealing, but it often comes with costly disadvantages and a lack of flexibility. Find out how to truly secure your financial future in the event of occupational disability and avoid costly mistakes.
The topic in brief and concise terms
A whole-of-life insurance policy with BUZ is often more expensive and less flexible than two separate contracts; if the main contract is cancelled, there is a risk of losing disability cover.
The returns on traditional endowment life insurance policies are usually low, with a guaranteed interest rate of currently one per cent (as of 2025).
Experts generally advise separating risk cover (BU) and investment, in order to save costs and gain flexibility.
Quick Facts: The Combined Policy Under the Microscope
Combining an endowment life insurance policy with a supplementary occupational disability insurance policy (BUZ) appears to offer a simple solution for two important areas of financial provision. One advantage is that, if occupational disability occurs, the main contract, i.e. the endowment life insurance policy, is often made premium-free. Some providers even continue the agreed escalation clauses of the main contract, which makes the savings process seem secure. However, this is often offset by higher overall costs compared with two separate contracts. Flexibility is another critical point: making the savings contract premium-free in the event of financial difficulties usually results in the loss of occupational disability cover. In addition, the choice of insurer for both components is not always ideal, as hardly any provider excels in both areas. These disadvantages often outweigh the supposed benefits. Separating savings goals and risk protection is therefore recommended by many experts.
Costs and returns: what the combination really delivers
The cost structure of an endowment life insurance policy with BUZ is complex and often more expensive than separate solutions. The guaranteed interest rate for newly concluded endowment life insurance policies has been just 1 per cent since 1 January 2025. While profit-sharing bonuses can increase returns, these are not guaranteed. The actual return after deducting all costs, including the risk costs for disability cover, often falls short of expectations. An example calculation: With a monthly disability benefit of EUR 1,500 over 25 years, the guaranteed payout totals EUR 450,000; the premiums for this have to be generated. The linkage can mean that an expensive savings contract is subsidised, while the disability cover may not offer the best terms. A calculation using a disability insurance calculator can provide clarity here. Choosing separate policies makes it possible to select higher-yield investment options for retirement provision while at the same time taking out robust, affordable disability cover.
Flexibility and Contract Adaptation: The Shackles of Coupling
A major disadvantage of capital life insurance with BUZ is the lack of flexibility. Changes to one part of the contract often affect the entire policy. For example, if you want to increase the disability pension, the savings component of the capital life insurance often also has to be adjusted accordingly, which leads to higher overall costs. A temporary reduction in contributions or premium exemption for the capital life insurance, for instance in the event of financial difficulties, can mean the loss of the entire disability cover. This dependency can become a real problem in changing life situations, such as changing jobs or starting a family. Cancelling the entire combined policy is often the only option if one part no longer fits, which can result in the loss of contributions already paid and the important disability cover. Separate policies offer significantly more scope here for individual adjustments without jeopardising the other part of the contract. Consider which types of life insurance are more suitable for your situation.
Tax aspects of endowment life insurance with BUZ
The tax treatment of contributions and benefits is an important factor. Contributions to a standalone occupational disability insurance policy (SBU) or the BUZ portion of a combined policy can be claimed as other pension expenses. For employees, the maximum annual amount is EUR 1,900; for self-employed people, EUR 2,800. However, this amount is often already used up by contributions to health and long-term care insurance. An exception is the combination of the BUZ with a Rürup pension, where higher amounts can be deducted, with the BUZ portion allowed to make up a maximum of 49 per cent of the total premium. In the event of a claim, i.e. when the disability pension is paid out, it must be taxed as other income. In the case of an SBU or BUZ from an endowment life insurance policy, only the so-called earnings component is taxed. Its amount depends on the remaining term of the pension; for a pension term of, for example, 20 years, the taxable earnings component is 21 per cent. If the total taxable income is below the basic tax-free allowance (EUR 12,096 for 2025), the disability pension remains tax-free. The endowment life insurance policy itself offers the advantage that, when paid out after a term of at least twelve years and from the age of 62, only half of the gains have to be taxed.
Cancellation and alternatives: ways out of the combined contract
Cancelling an endowment life insurance policy with BUZ is usually associated with disadvantages. Cancelling the main contract often leads to the complete loss of income protection without compensation. In addition, due to policy set-up and administration costs, the surrender value of the endowment life insurance policy is often lower than the total amount of premiums paid in. Before cancelling, you should consider alternatives:
Premium waiver: The contract continues with reduced benefits, but income protection may lapse.
Sale: On the secondary market, it is sometimes possible to achieve a better price than the surrender value.
Borrowing against the policy: The contract serves as security for a loan, and the insurance cover remains in place.
The best alternative to a combined policy is often to separate the two from the outset: a standalone income protection insurance and a separate savings plan. This allows the best possible choice for both areas and greater flexibility. If you already have a combined contract, a switch should be carefully considered, especially if your health has deteriorated, which can make taking out a new income protection policy more difficult or more expensive.
Expert depth: legal framework and recent rulings
The Insurance Contract Act (VVG) forms the legal basis for endowment life insurance policies with BUZ. Particularly relevant are the provisions on the pre-contractual duty of disclosure (§ 19 VVG) and the conditions for the obligation to pay benefits in the event of occupational disability. Recent rulings show that courts often decide in favour of policyholders when the insurance terms are unclear or the insurer does not sufficiently examine its obligation to pay benefits. For example, the Frankfurt am Main Higher Regional Court ruled on 7 May 2025 that a master plumber cannot be referred in general terms to work as a caretaker (case no. not specified, general reference to the case-law database). A ruling by the Hamburg Regional Court of 28 May 2025 underlines the importance of precise expert reports. Our expert tip: Pay attention to a clear definition of occupational disability and as little scope for referral as possible in the terms and conditions. A good occupational disability insurance policy should avoid abstract referral and keep concrete referral narrowly defined, ideally with an income threshold of no more than 20 per cent reduction. If there is any uncertainty or dispute with the insurer, early legal advice is often crucial.
Imagine a 30-year-old employee who has taken out an endowment life insurance policy with BUZ providing a monthly disability income of €1,500. After ten years, she realises that the return on the endowment life insurance barely keeps pace with inflation. A separate disability insurance policy would have been cheaper, and she could have invested the money saved in a more return-oriented way. If she now cancels it, she loses part of her contributions and the disability cover. Had she chosen separate contracts from the outset, she could adjust or switch the savings plan without jeopardising the important disability cover. Another typical situation: A tradesperson becomes unable to work at the age of 50. His combined policy provides disability income until 63, because the endowment life insurance then matures. He could have taken out separate disability insurance until 67, which would have significantly reduced the pension gap. Our recommendation is therefore:
Review existing combined contracts critically with regard to costs, flexibility and benefits.
Do not let the disability cover end automatically with the endowment life insurance; instead, keep cover in place until the statutory retirement age.
Always compare the costs and benefits of combined policies with those of two separate contracts. Often, the separate solution is 10 to 20 per cent cheaper while offering better benefits.
For retirement provision, use flexible, higher-yield products instead of a low-interest endowment life insurance policy.
A look at pure endowment life insurance policies shows how weak their returns are today. These insights will help you make the right decision for your protection.
Conclusion: Why separating saving and risk protection is usually the better choice
At first glance, endowment life insurance with occupational disability cover seems practical, but on closer inspection it often turns out to be a suboptimal solution. The disadvantages, such as higher costs, limited flexibility and the difficulty of finding the best provider for both components, outweigh the benefits in most cases. Cancelling it is often costly and puts the existentially important occupational disability cover at risk. The clear recommendation in over 90 per cent of cases is therefore: separate cover for the occupational disability risk from your retirement provision. Take out a standalone, high-performing occupational disability insurance policy and choose flexible, return-oriented savings products for building your wealth. This keeps you adaptable and provides optimal protection in the event of occupational disability. Let us review your individual situation free of charge. Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive concrete suggestions for optimisation.
More useful links
GDV offers a publication with the latest figures on German life insurance.
Statista shows the distribution of life insurance policies in Germany.
GDV provides seven key facts about disability insurance.
Statista provides data on ownership of disability insurance policies in Germany.
The German Pension Insurance provides comprehensive information on the reduced earning capacity pension.
The Consumer Advice Centre explains how to protect yourself against loss of income due to disability.
The Federal Health Reporting System (GBE-Bund) looks at the topic of disability from a health perspective.
FAQ
Is an endowment life insurance policy with income protection still worthwhile today?
In most cases, no. The disadvantages, such as high costs, limited flexibility and often suboptimal performance by both contracting parties, outweigh the advantages. Separate contracts are usually more beneficial.
Can I cancel or adjust the BU part separately?
No, with combined policies, adjustments or cancellations are usually only possible for the entire contract. A separate change to the occupational disability part is generally not предусмотрed.
What are the biggest disadvantages of linking an endowment life insurance policy and occupational disability insurance?
The biggest disadvantages are higher overall costs, a lack of flexibility when making changes or cancelling, being tied to an insurer that may not be optimal for both areas, and the potential loss of disability insurance cover if the savings contract is cancelled.
How is the pension from a BUZ taxed?
The disability pension from a BUZ, which is linked to a capital life insurance policy, is taxed using the so-called earnings portion. The amount of the earnings portion depends on the age at the start of the pension or the expected duration of the pension.
What role does the guaranteed interest rate play in endowment life insurance?
The guaranteed interest rate (currently one per cent for new contracts since 2025) is the minimum interest rate on the savings portion. Due to the low interest rate environment and the costs, the actual return is often low.
What is the expert tip regarding endowment life insurance with BUZ?
Experts almost unanimously advise arranging occupational disability cover and retirement provision/capital investment in separate contracts. This offers greater flexibility, better comparison options and often more favourable terms.
