Cancelling life insurance and getting money back: strategies for maximum returns
21.04.25
4
Minutes
Katrin Straub
Managing Director at nextsure
Are you thinking about cancelling your life insurance and wondering how you can get your money back? Cancelling is often associated with losses, but there are ways to get more out of it. This article shows you which options you have and how to make an informed financial decision.
The topic in brief and concise terms
Cancelling a life insurance policy often leads to financial losses; alternatives such as selling it or revoking it are usually more advantageous and can bring several thousand euros more.
The surrender value is regulated by law in § 169 VVG, but is often lower than the contributions paid in, especially in the first policy years.
For contracts concluded between 1994 and 2007, revocation due to incorrect information may still be possible even years later and can lead to reimbursement of all contributions plus interest.
Quick overview: What happens financially when you cancel your life insurance policy
If you cancel your life insurance policy, you will receive the so-called surrender value. This amount is often lower than the total of your contributions paid in, especially in the first five to ten years. This is due to high initial and administrative costs deducted by your insurer. In addition, if you cancel, you often forfeit terminal bonus shares, which can make up a significant part of the total return. Cancellation should therefore be the last option, after all alternatives have been considered. There are better ways, such as the sale of old contracts.
The surrender value: What you really get back
The surrender value is the amount your insurer pays out if you cancel the policy early. The calculation basis is set out in the German Insurance Contract Act (§ 169 VVG). Put simply, the surrender value is made up of the premiums paid in plus interest and bonuses, less the policy initiation and administration costs, as well as any possible cancellation fee. Especially in the first few years, the surrender value can be disappointingly low. For contracts concluded between 2001 and 2007, there is a rule that the surrender value must amount to at least fifty per cent of the premiums paid in. You can ask your insurer for the exact surrender value at any time; they are obliged to provide you with this information. Think carefully about whether making your endowment life insurance paid-up might not be more sensible.
Practical example: Understanding the financial consequences of termination
Suppose you took out a life insurance policy with an investment component seven years ago and paid one hundred euros a month, a total of 8,400 euros. If you cancelled it after those seven years, the surrender value could, for example, be only 6,500 euros. The loss of 1,900 euros arises from offset upfront costs and administration fees. This loss can even be higher in the first five policy years. If you had held the contract until the end of the term, for example thirty years, the maturity benefit including the final bonus and compound interest would have been significantly higher. This example illustrates why cancellation is often the financially worst option. One alternative could be to check whether you can convert your term life insurance.
Alternatives to cancellation: Get more money out of your contract
Before cancelling your life insurance policy and reclaiming money, you should consider more lucrative alternatives. These options can often secure you more than the surrender value alone:
Sale of the life insurance policy: Specialised providers often buy your policy for two to four per cent more than the surrender value. The contract then continues with the buyer.
Right of rescission: If the cancellation notice is faulty, especially for contracts between 1994 and 2007, a "perpetual right of rescission" may be possible. You will then often receive all contributions plus interest back, minus minor costs.
Premium-free policy: You stop paying premiums, but the policy continues with reduced cover and a lower maturity benefit. The capital accumulated continues to earn interest.
Policy loan: You use your policy as security and receive a loan equal to the surrender value. The contract remains in force.
Our expert tip: Always have it checked whether rescission is an option for your contract, as this often allows the highest payout. The different types of life insurance policies offer different options.
Expert knowledge: legal foundations and current rulings
The cancellation and surrender value of life insurance policies are regulated in Section 169 of the Insurance Contract Act (VVG). This law specifies how the surrender value is to be calculated and that acquisition costs for contracts from 2008 onwards must be spread over the first five years. Particularly relevant for older contracts (concluded 1994-2007) is the case law of the Federal Court of Justice (BGH) on the "eternal right of revocation". Due to defective revocation information, many of these contracts can still be revoked today, which often leads to a significantly higher payout than cancellation. The insurer must then reimburse almost all premiums paid plus the interest earned; only a deduction for the risk cover enjoyed is permissible. It is advisable to know the differences between annuity and life insurance, as this can influence the options.
Tax considerations when paying out: What you need to know
If you cancel your life insurance policy and receive money back, taxes may be due. The decisive factor is the policy’s commencement date. For contracts concluded before 1 January 2005, the surrender value is generally tax-free if the contract ran for at least twelve years and premiums were paid for at least five years. For newer contracts (concluded after 31 December 2004), the gain – that is, the difference between the payout and the contributions paid in – is taxable. Under certain conditions (term of at least twelve years, payout from the age of 60 or 62), only half of the gain has to be taxed (half-income method). In the case of term life insurance, the question of taxation of the surrender value does not arise, as it has no savings component. It is best to clarify your tax situation with a life insurance tax calculator or an adviser before you declare the payout in your tax return.
To make the financially best decision regarding your life insurance, proceed systematically. First, determine the current surrender value with your insurer – they must inform you of this within fourteen days. At the same time, obtain offers for the sale of your policy; you will often receive two to seven per cent more here. In particular, for contracts from the period 1994 to 2007, have it checked free of charge whether revocation may be possible due to incorrect instruction; this can bring you several thousand euros extra. Compare these three options: termination (payout of the surrender value), sale and revocation. Also consider the possibility of a termination of your private pension insurance and the taxes, if this is an alternative. Weigh up which option best suits your needs and financial situation. Our expert tip: Termination is almost always the worst choice; examine alternatives carefully.
Your next step: Personalised review for maximum returns
The decision to terminate a life insurance policy early is complex and has far-reaching financial consequences. As you have seen, simply cancelling it is rarely the best way to recover your money. A careful review of alternatives such as selling or exercising your right of withdrawal can often bring you several thousand euros more. Take the opportunity to obtain a professional assessment of your situation. At nextsure, we are happy to help you find the solution that is best for you and get the maximum out of your contract. A premium escalation in older endowment life insurance policies can also play a role. Request your individual risk analysis now.
Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive concrete suggestions for optimisation.
More useful links
Ihre Vorsorge explains how the value of a life insurance policy is determined and which factors play a role in it.
Bundesgerichtshof (BGH) provides access to legal documents and judgments that, among other things, concern the 'perpetual right of withdrawal' in life insurance policies.
Wikipedia provides a comprehensive article on life insurance in Germany, highlighting basic information and historical developments.
Gesetze im Internet provides access to the information obligations regulations (VVG-InfoV) under the Insurance Contract Act, which are relevant to consumers.
FAQ
What is the surrender value of a life insurance policy?
The surrender value is the amount the insurer pays out if the policy is terminated early. It is calculated from the premiums plus surplus bonuses minus costs and cancellation charges.
Is it better to cancel a life insurance policy or sell it?
A sale often brings in two to seven per cent more money than the surrender value in the event of cancellation. Therefore, selling is usually the better option.
What does "perpetual right of withdrawal" mean for life insurance policies?
If the withdrawal notice in contracts from 1994-2007 is defective, the contract can often still be withdrawn even years later. You will then usually receive back all contributions plus interest.
What costs are incurred when cancelling a life insurance policy?
If the policy is cancelled, the insurer deducts initial and administration costs, as well as possibly a cancellation fee, from the balance.
How do I properly cancel my life insurance policy?
Cancellation must be made in writing (letter or email), stating the insurance policy number and the desired cancellation date. Please request confirmation.
Can I make my life insurance paid-up?
Yes, premium waiver is an alternative to cancellation. You no longer pay contributions, the policy continues with reduced cover, and the balance continues to earn interest.
