Cancel life insurance and get money back: Strategies for maximum returns
21 Apr 2025
6
Minutes
Katrin Straub
CEO at nextsure
Are you considering cancelling your life insurance and wondering how to get your money back? Termination is often associated with losses, but there are ways to get more out of it. This article will show you what options are available and how to make an informed financial decision.
The topic in brief and concise terms
Cancelling a life insurance policy often results in financial losses; alternatives such as selling or revocation are usually more advantageous and can yield several thousand euros more.
The surrender value is regulated by law in § 169 VVG, but it is often lower than the contributions paid in, especially in the first years of the contract.
For contracts signed between 1994 and 2007, a withdrawal due to incorrect instructions may still be possible even after years, potentially leading to a refund of all contributions plus interest.
Immediate Overview: What Happens Financially When You Cancel Your Life Insurance
If you cancel your life insurance policy, you will receive what's known as the surrender value. This amount is often lower than the sum of your paid contributions, especially in the first five to ten years. The reason for this is the high acquisition and administrative costs that your insurer deducts. Additionally, by cancelling, you often miss out on final surplus shares, which can make up a significant portion of the total return. Therefore, cancellation should be the last option, after all alternatives have been explored. There are better ways, such as the sale of old policies.
The surrender value: What you really get back
The surrender value is the amount your insurance pays out in case of an early termination. The basis for its calculation is defined in the Insurance Contract Act (§ 169 VVG). Simply put, the surrender value results from the premium payments made plus interest and profits, minus initial and administrative costs as well as a 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 regulation that the surrender value must be at least fifty percent of the premiums paid. You can inquire about the exact surrender value from your insurer at any time; they are obliged to provide you with this information. Carefully consider whether it might be more sensible to suspend premium payments for your whole life insurance.
Practical Example: Understanding the Financial Consequences of a Dismissal
Suppose you took out a whole life insurance policy seven years ago and paid one hundred euros every month, totalling 8,400 euros. If you were to cancel after these seven years, the surrender value might only be 6,500 euros. The loss of 1,900 euros results from charged acquisition costs and administrative fees. This loss can be even higher in the first five years of the contract. Had you kept the contract until the end of the term, for example, thirty years, the maturity benefit including final bonus and compound interest would have been significantly higher. This example illustrates why cancellation often represents the financially worst option. An alternative might be to check whether you can convert your term life insurance.
Alternatives to cancellation: Get more money from your contract
Before cancelling your life insurance policy and claiming a refund, you should explore more lucrative alternatives. These options can often secure you more than the mere surrender value:
Selling the life insurance policy: Specialized providers often purchase your policy for two to four percent more than the surrender value. The contract is then continued by the purchaser.
Contract withdrawal: In the case of incorrect withdrawal instructions, especially for contracts between 1994 and 2007, a "perpetual withdrawal" might be possible. You would then often receive all contributions plus interest back, minus minor costs.
Premium exemption: You no longer pay premiums, but the contract continues with reduced cover and lower maturity benefits. The accumulated capital continues to earn interest.
Policy loan: You take out a loan against your policy and receive a loan equivalent to the surrender value. The contract remains in force.
Our expert tip: Always check whether a withdrawal is possible for your contract, as this often allows for the highest refund. The different types of life insurance offer various options.
Expert knowledge: Legal foundations and current judgments
The termination and surrender value of life insurance policies are regulated in § 169 of the Insurance Contract Act (VVG). This law stipulates how the surrender value is to be calculated and that for contracts from 2008 onwards, acquisition costs 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) regarding the "perpetual right of withdrawal". Due to incorrect withdrawal information, many of these contracts can still be revoked today, which often leads to a significantly higher payout than a termination. The insurer must then reimburse almost all premiums paid plus the interest accrued, only a deduction for the risk protection enjoyed is permissible. It is advisable to know the differences between pension and life insurance, as this can influence the options available.
Tax aspects when paying out: What you need to know
If you terminate your life insurance policy and receive money back, taxes may apply. The key factor is the contract's completion date. For contracts concluded before the first of January 2005, the surrender value is generally tax-free if the contract ran for at least twelve years and contributions were paid for at least five years. For newer contracts (concluded after the 31st of December 2004), the earnings – that is, the difference between the payout and the contributions made – are taxable. Under certain conditions (a term of at least twelve years, payout from the age of 60 or 62), only half of the earnings must be taxed (half-income method). For term life insurance, the question of taxation of the surrender value does not arise, as it does not have a savings component. It is best to clarify your tax situation with a life insurance tax calculator or an advisor before you declare the payout in your tax return.
Recommendation: Step by step to the best decision
To make the best financial decision regarding your life insurance, proceed systematically. First, determine the current surrender value from your insurer - this must be communicated to you within fourteen days. Simultaneously, obtain offers for selling your policy; you often receive two to seven percent more here. Have contracts from the period 1994 to 2007 checked for free to see if a cancellation due to incorrect advisement is possible; this can bring you several thousand euros more. Compare these three options: cancellation (payout surrender value), sale, and cancellation. Also consider the possibility of a cancellation of your private pension insurance and the taxes, if this is an alternative. Weigh which option best suits your needs and financial situation. Our expert tip: cancellation is almost always the worst choice; thoroughly check alternatives.
Your next step: Individual review for maximum returns
More useful links
Ihre Vorsorge explains how the value of a life insurance policy is determined and which factors play a role.
Bundesgerichtshof (BGH) provides access to legal documents and judgments, including those concerning the 'eternal right of withdrawal' for life insurance policies.
Wikipedia offers a comprehensive article on life insurance in Germany, shedding light on basic information and historical developments.
Gesetze im Internet provides access to the VVG-InfoV regulations within the framework of the Insurance Contract Act, which are relevant for consumers.
FAQ
What is the surrender value of a life insurance policy?
The surrender value is the amount the insurance pays out in the event of early termination. It is calculated from the premiums plus surpluses minus costs and cancellation fees.
Is it better to cancel or sell a life insurance policy?
A sale often brings two to seven percent more money than the surrender value upon cancellation. Therefore, selling is usually the better option.
What does "eternal right of withdrawal" mean in life insurance?
In the case of incorrect cancellation policies in contracts from 1994-2007, the contract can often still be revoked years later. You will usually receive all contributions plus interest back.
What costs are incurred when cancelling a life insurance policy?
Upon termination, the insurer deducts acquisition and administration costs, as well as any cancellation fees, from the balance.
How do I properly cancel my life insurance?
The cancellation must be made in writing (by letter or email) stating the insurance number and the desired cancellation date. Request confirmation.
Can I put my life insurance policy on a premium-free basis?
Yes, a premium waiver is an alternative to cancellation. You no longer pay contributions, the contract continues with reduced coverage, and the balance continues to accrue interest.
