Securing your home purchase: how your life insurance policy can become a smart form of loan security and help you save up to 20 per cent in interest costs
30.04.25
11
Minutes
Katrin Straub
Managing Director at nextsure
The dream of owning your own home is getting closer, but financing poses major challenges for many people. A life insurance policy can serve as collateral and often enable better loan terms. Find out how you can use your policy as security for up to 100 per cent of its surrender value.
The topic in brief and concise terms
A life insurance policy (endowment or term) can serve as security for a home loan and often lead to better interest rates.
Assigning the claims under the life insurance policy to the bank is the most common way to use it as security.
Endowment life insurance policies are suitable because of their surrender value, while term life insurance policies are primarily for covering the remaining debt in the event of death.
Loan security: understanding the foundation of your home financing
Banks only grant large loans for purchasing a house against security. This loan collateral significantly minimises the bank’s default risk. Solid security can improve your creditworthiness by up to 15 points. This often leads to more favourable interest terms for your property finance. The most common form of security is the land charge, which grants the bank rights of realisation over the property. However, there are alternatives, such as life insurance, which is often overlooked. This can play an important role when the land charge alone is not sufficient or specific advantages are sought.
Choosing the right policy: Which life insurance is suitable as security?
For securing a house purchase, there are primarily two types of life insurance to consider. Whole-of-life insurance with a savings component combines death cover with a savings element and builds up capital over the years. This capital, often tens of thousands of euros, can serve as security or be used for repayment. Term life insurance, by contrast, offers pure death cover for a fraction of the cost of a whole-of-life insurance policy with a savings component. It primarily protects the surviving dependants by covering the remaining loan balance in the event of death. A term life insurance policy with a sum insured of €200,000 can be available from as little as €15 per month. Which policy is ideal depends on your risk appetite and financial situation; often, a combination makes sense.
Whole-of-life insurance with a savings component: combining security and capital accumulation
A whole-of-life insurance policy serves as security through its surrender value, which grows over the term. Banks accept this value, often up to 100 per cent, as security for the loan. The amount accumulated can ultimately be used to repay a loan due at maturity. Many policies taken out before 2005 also offer tax-free payouts. However, note that returns on newer policies are often only one to two per cent.
Term life insurance: cost-effective protection for your family
The term life insurance is pure death cover and therefore significantly cheaper. Its main function is to protect the family from the financial consequences of the loss of a borrower. The sum insured should at least match the loan amount, for example €300,000. Many banks require such cover, especially if there is only one main earner. A decreasing sum insured adapts to the falling outstanding balance and can reduce premiums by up to 30 per cent.
Implementation: How your life insurance becomes loan collateral
The most common way to use a life insurance policy as security is to assign the claims to the bank. In doing so, all rights under the contract, including the sum assured, are transferred to the lending institution. This is recorded in an assignment agreement, which often comprises only a few pages. In the event of a claim or cancellation, the bank receives the corresponding amount up to the level of the outstanding debt. Another option is a policy loan, in which you take out a loan secured directly against your insurance policy. Here, the surrender value serves as the basis for a loan from the insurer itself, often up to 85 per cent of the value. This approach is useful if you need capital in the short term without cancelling the policy. This makes financing your home more flexible.
The following steps are typical for the assignment:
Review of the policy by the bank (surrender value, term).
Signing of an assignment declaration (usually one to two pages).
Notification of the assignment to the insurance company.
Recording of the assignment in the insurer’s documents.
Once the loan has been fully repaid, the policy is reassigned to you.
Cost-benefit analysis: Is life insurance as security the right choice?
Using a life insurance policy as collateral offers several advantages for your home financing. It can be recognised by the bank as full-value security and improve loan terms. With endowment life insurance, you benefit from both death cover and capital accumulation. A term life insurance policy protects your loved ones for often less than 50 euros per month. In contrast, there are the costs of the insurance policy itself. With endowment life insurance, low interest rates can mean that the maturity benefit turns out lower than expected. Early cancellation is often associated with losses of up to 30 percent of the premiums paid. Weigh these factors carefully before making a decision.
The advantages include:
Additional security for the bank; this often results in an interest discount of 0.1 to 0.3 percentage points.
Death cover: in the event of the worst happening, your family is protected from losing the family home.
Capital accumulation with endowment life insurance, which can later be used for repayment.
Flexibility: existing contracts can often be used without complications.
Tax advantages for older policies (taken out before 2005).
The disadvantages include:
Ongoing costs for the insurance policy over many years.
Investment risk with endowment life insurance in periods of low interest rates.
Risk of loss if the policy is cancelled early (surrender charges of up to 30 percent).
More complex administration compared with a simple mortgage lien.
Possible tax disadvantages with newer policies or if structured incorrectly.
A suitable term life insurance can be a cost-effective solution here.
Use expert knowledge: Avoid tax and legal pitfalls
When using a life insurance policy as loan collateral, tax and legal aspects are crucial. Payouts from life insurance policies taken out before 2005 are often tax-free. For newer contracts, the returns are generally subject to capital gains tax of 25 per cent plus the solidarity surcharge. It is important to note that assigning a life insurance policy as security for a private home loan is generally not considered a tax-damaging use. The situation is different if the loan is used to generate income (e.g. rental income); in this case, the special expenses deduction for the contributions may no longer apply. [§10,,] Make sure the assignment arrangement is drafted clearly and correctly. Current court rulings, for example on the calculation of surrender values, can affect the contractual terms. A thorough review of your policy and the assignment agreement by experts can help you avoid pitfalls and optimise your tax burden. Our expert tip: Have it checked in advance whether your policy is suitable for an assignment by way of security and what tax consequences this will have for your individual situation; this can save you up to several hundred euros in tax.
Consider alternatives: Other ways to secure your home loan
Life insurance is just one of several options for securing a loan. A land charge is the most common form and is routinely required by banks for property financing. It gives the bank a direct right of access to the property in the event of default. A home savings contract can also serve as security if it already has corresponding savings of at least 40 per cent of the home savings amount. Securities portfolios or other unencumbered properties can also be pledged as security. A loan repayment insurance specifically protects the loan instalments in the event of death, incapacity for work or unemployment. Each of these alternatives has specific advantages and disadvantages that you should weigh against your needs. A land charge is usually unavoidable, while other forms of security can have a supplementary effect. Choosing the right security can affect your financing costs by several thousand euros.
Life insurance can be a valuable building block in making the dream of owning your own home a reality while also protecting your family. Whether a whole-of-life policy with its savings component or a pure term life insurance policy for family protection – both can serve as security for your home financing. What matters is a thorough analysis of your situation and a comparison of the options. Careful planning and taking account of all costs, benefits and risks are crucial. With the right strategy, your life insurance can help you secure better loan terms and move into your own home with peace of mind. Remember that good family protection covers more than just the property.
Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive specific recommendations for optimisation.
More useful links
Finanztip offers detailed information on taking out loans against life insurance policies.
Statista visualises the development of construction loan interest rates in Germany.
Statista shows the development of residential construction loans since 1991.
The Deutsche Bundesbank provides current interest rates for residential construction loans to private households.
The Federal Statistical Office (Destatis) provides datasets on loans and online transactions.
The Deutsche Bundesbank publishes comprehensive data on deposit and loan interest rates.
FAQ
How high must the surrender value of my life insurance be?
The bank determines the minimum value the collateral must have. Often, the current surrender value or a certain percentage of it (e.g. 80-100 per cent) is accepted as collateral. For term life insurance policies, the required sum insured is based on the amount of the loan.
What happens to my life insurance after the loan has been repaid?
Once the loan has been fully repaid, the assignment of the life insurance will be lifted by the bank. The rights under the policy will then return to you in full.
Can I use an existing life insurance policy?
Yes, in many cases, existing endowment or term life insurance policies can already be used as security for a property loan. The bank will review the terms and conditions and the current value of the policy.
What documents does the bank require for the life insurance policy as collateral?
As a rule, the bank requires the insurance certificate (policy), current information on the surrender value (for endowment life insurance) and a signed assignment declaration.
Does using it as loan collateral affect my insurance benefits?
The insurance cover itself (e.g. death benefit) remains in place. In the event of a claim, however, the bank is served first up to the amount of the outstanding debt. Any surplus is passed on to the originally designated beneficiaries.
Are there alternatives to life insurance as loan collateral?
Yes, the most common form of security is the land charge. Other alternatives are building society savings contracts, securities or other properties. A standalone balance protection insurance policy is also an option.
