Secure your home purchase: How your life insurance can become a smart loan security and save you up to 20 percent on interest costs
30 Apr 2025
5
Minutes
Katrin Straub
CEO at nextsure
The dream of owning a home is getting closer, but financing presents many people with major challenges. A life insurance policy can serve as security and often enable better loan conditions. Discover how you can use your policy with up to 100 per cent of its surrender value as security.
The topic in brief and concise terms
A life insurance policy (capital or term) can serve as collateral for a home loan and often lead to better interest conditions.
Assigning claims from the life insurance policy to the bank is the most common way to use it as collateral.
Endowment life insurance is suitable due to its surrender value, while term life insurance is primarily for securing the outstanding debt in the event of death.
Credit Security: Understanding the Foundation of Your Home Financing
Banks only grant high loans for house purchases against collateral. These credit securities significantly minimize the risk of default for the bank. A solid security can improve your creditworthiness by up to 15 points. This often leads to more favourable interest rates for your mortgage. The most common collateral is the land charge, which grants the bank rights to the property's realization. However, there are alternatives, such as life insurance, which is often overlooked. This can play an important role if the land charge alone is not sufficient or specific advantages are sought.
Selecting the Right Policy: Which Life Insurance is Suitable as Security?
Primarily two types of life insurance are considered for securing a house purchase. The endowment policy combines death protection with a savings component and builds up capital over the years. This capital, often tens of thousands of euros, can serve as security or be used for repayment. On the other hand, term life insurance offers pure death protection at a fraction of the cost of an endowment policy. It primarily secures the survivors by covering the remaining loan balance in the event of death. Term life insurance with a sum insured of €200,000 can be available for as little as €15 per month. The ideal policy depends on your risk tolerance and financial situation; often a combination is sensible.
Endowment Policy: Combining Security with Capital Building
An endowment policy serves as collateral through its surrender value, which increases over the term. Banks accept this value, often up to 100 percent, as security for the loan. The saved amount can be used at the end to repay a bullet loan. Many contracts concluded before 2005 also offer tax-free payouts. However, note that returns on newer contracts are often only one to two percent.
Term Life Insurance: Cost-effective Protection for Your Family
Term life insurance is pure protection in the event of death and therefore significantly cheaper. Its main function is to protect the family from the financial consequences of losing a borrower. The sum insured should at least match the loan amount, for example, €300,000. Many banks require such security, especially if there is only one main earner. A variant with a decreasing sum insured adapts to the declining remaining debt and can reduce premiums by up to 30 percent.
Implementation: How your life insurance becomes loan security
The most common way to use a life insurance policy as collateral is to assign the claims to the bank. In this process, all rights from the contract, including the insurance sum, are transferred to the credit institution. This is documented in an assignment agreement, which often is just a few pages long. In the event of a claim or cancellation, the bank receives the corresponding amount up to the level of the remaining debt. Another option is a policy loan, where you directly pledge your insurance. In this case, the surrender value serves as the basis for a loan from the insurer itself, often up to 85 percent of the value. This is a practical approach if you need short-term capital without cancelling the policy. Financing your own home becomes more flexible this way.
The following steps are typical for the assignment process:
Examination 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.
Notation of the assignment in the insurer’s records.
Once the loan is fully repaid, the policy is reassigned to you.
Cost-Benefit Analysis: Is Life Insurance the Right Choice for Security?
Using a life insurance policy as security offers several advantages for your mortgage financing. It can be recognised by the bank as full security and improve loan conditions. With endowment life insurance, you benefit from death cover and capital accumulation. A term life insurance policy can protect your relatives for often less than 50 euros a month. On the other hand, there are the costs of the insurance policy itself. With endowment life insurance, low interest rates can result in maturity benefits being lower than expected. Early termination is often associated with losses of up to 30 percent of the capital paid in. Weigh these factors carefully before making a decision.
The advantages include:
Additional security for the bank, often leading to an interest rate reduction of 0.1 to 0.3 percentage points.
Death cover: Your family is protected from the loss of the home in the event of a worst-case scenario.
Capital accumulation with endowment life insurance, which can be used for future repayment.
Flexibility: Existing contracts can often be used without complication.
Tax advantages with older contracts (concluded before 2005).
The disadvantages include:
Ongoing costs for the insurance policy over many years.
Yield risk with endowment life insurance during periods of low interest rates.
Risk of loss on early termination of the policy (surrender charges of up to 30 percent).
Complexity in processing compared to a straightforward land charge.
Possible tax disadvantages with newer contracts or incorrect structuring.
A sensible term life insurance can be a cost-effective solution here.
Harnessing Expert Knowledge: Avoiding Tax and Legal Pitfalls
Using life insurance as collateral for a loan involves crucial tax and legal considerations. Payouts from life insurance policies taken out before 2005 are often tax-free. More recent contracts generally incur a capital gains tax of 25 percent plus solidarity surcharge. It is important to note that assigning a life insurance policy as security for a personal home loan generally does not constitute a use detrimental to taxes. It is different if the loan is used to generate income (e.g., renting out property); in this case, the deduction for special expenses on contributions may be lost. [§10,,] Ensure the contract assignment is clearly drafted. Recent court rulings, such as those concerning the calculation of surrender values, can affect contract terms. A thorough examination of your policy and assignment agreement by experts can help you avoid pitfalls and optimize your tax burden. Our expert tip: Have it checked in advance whether your policy is suitable for assignment as collateral and what tax implications this may have for your specific situation; this could save you up to several hundred euros in taxes.
Exploring Alternatives: Other Ways to Secure Your Mortgage
Life insurance is just one of several options for securing a loan. A mortgage is the most common form and is routinely required by banks for real estate financing. It gives the bank a direct right of access to the property in case of payment default. A building society contract can also serve as security if it already has a corresponding credit balance of at least 40 percent of the total savings amount. Securities deposits or other unencumbered properties can also be used as collateral. A residual debt insurance specifically secures the loan's instalment payments in the event of death, disability, or unemployment. Each of these alternatives has specific advantages and disadvantages that you should weigh against your needs. A mortgage is usually unavoidable, while other securities can act as supplements. Choosing the right security can impact your financing costs by several thousand euros.
Conclusion: Life insurance as a building block for a secure future in your own home
Life insurance can be a valuable component in realizing the dream of owning your own home while simultaneously safeguarding your family. Whether it’s a whole life insurance policy with its savings component or a pure term life insurance for family protection – both can serve as collateral for your home financing. It is important to conduct a thorough analysis of your situation and compare the options. Careful planning and consideration of all costs, benefits, and risks are crucial. With the right strategy, your life insurance can help you secure more favourable loan conditions and move into your own four walls with peace of mind. Remember that good family protection encompasses more than just the property.
Request a personal risk analysis now: Have your insurance situation checked for free and receive concrete suggestions for optimization.
More useful links
Finanztip provides detailed information on borrowing against life insurance policies.
Statista visualises the development of construction interest rates in Germany.
Statista shows the development of housing loans since 1991.
The Deutsche Bundesbank provides current interest rates for housing loans to private households.
The Federal Statistical Office (Destatis) offers datasets on loans and online transactions.
The Deutsche Bundesbank publishes comprehensive data on deposit and loan interest rates.
FAQ
What should the surrender value of my life insurance be?
The bank specifies the minimum value that the collateral must have. Often, the current surrender value or a certain percentage of it (e.g. 80-100 percent) is accepted as collateral. For term life insurances, the required sum insured is based on the loan amount.
What happens to my life insurance after the loan is repaid?
Once the loan has been fully repaid, the assignment of the life insurance will be revoked by the bank. The rights from the contract will be fully returned to you.
Can I use an existing life insurance policy?
Yes, in many cases, existing capital or term life insurance policies can be used as collateral for construction financing. The bank will check the conditions and the current value of the policy.
What documents does the bank require for the life insurance as collateral?
Usually, the bank requires the insurance policy, a current statement of the surrender value (for whole life insurance policies), and a signed assignment declaration.
Does using it as credit security affect my insurance benefits?
The insurance coverage itself (e.g., death benefit) remains in place. In the event of a claim, however, the bank is prioritised up to the amount of the outstanding debt. Any potential surplus goes to the original beneficiaries.
Are there alternatives to life insurance as collateral for a loan?
Yes, the most common form of security is a land charge. Other alternatives include savings contracts, securities, or other real estate. A pure residual debt insurance is also an option.
