Life Insurance Payout: How to Maximise Your Return
17 May 2025
3
Minutes
Katrin Straub
CEO at nextsure
Many insured individuals wonder: Life insurance—what do I get out of it? The answer depends on the contract details, the term, and the method of payout. Learn here how to accurately assess your payout amount and avoid financial disadvantages.
The topic in brief and concise terms
The payout of a life insurance policy (maturity benefit) consists of guaranteed interest, savings shares, and bonuses; in the event of cancellation, you receive the often lower surrender value.
Pre-2005 contracts are usually tax-advantaged, while newer contracts are subject to a withholding tax (25 percent on income) or the half-income method.
You can choose between a lump-sum payment and an annuity; early termination is usually associated with financial disadvantages, so alternatives should be considered.
Payout Amount of Your Life Insurance: The Key Facts
Key Insights on Payout
The payout amount of your life insurance consists of guaranteed benefits and possible surpluses.
In the event of early termination, you will receive the surrender value, which is often less than the premiums paid; around 50 percent of policies are terminated early.
The taxation of the payout depends on the contract date: older contracts (before 2005) are often tax-free, while newer ones are subject to a withholding tax of 25 percent on the earnings.
You usually have the choice between a single lump sum payout or a lifelong pension.
The question “Life insurance - what do I get out of it?” concerns many policyholders, often years before the actual contract ends. The actual sum depends on numerous factors, which we explain in detail below. A thorough understanding of these aspects is crucial for your financial planning.
Understanding performance process: This is what you usually receive
The regular payout at the end of the contract term is called the maturity benefit. This amount is the core of what you receive from your life insurance. It typically consists of several components that have been accumulated over decades.
The guaranteed maturity benefit is based on the savings portions of your contributions and the guaranteed interest rate applicable at the time of contract conclusion. This guaranteed interest rate could be up to four percent for contracts before the year 2000. For contracts concluded between July 2000 and the end of 2003, it was often 3.25 percent.
In addition to the guaranteed amount, there are surplus participations. These are not guaranteed and depend on the insurer's economic success. The differences between pension and life insurance can become relevant here. The maturity benefit can be paid out as a lump sum or as a pension. This decision significantly influences your financial flexibility in retirement.
Early Termination: The Surrender Value as the Basis for Payment
If you terminate your life insurance policy early, you will receive the so-called surrender value. This value is often a painful point, as it is frequently lower than the sum of the contributions paid, especially in the early years of the contract. One of the reasons for this is the initial costs and administration fees that are charged at the beginning.
The surrender value consists of the accumulated contributions minus risk protection and costs, plus any profits already credited. For unit-linked policies, the surrender value corresponds to the current value of the fund shares. Many policyholders underestimate the financial losses of an early termination; up to 35 percent cancel because they can no longer afford the contributions.
Alternatives to cancellation can include:
Premium exemption: The contract continues without further premium payments, and the sum insured is reduced. Find out more about making a capital life insurance policy paid-up.
Policy loan: You can borrow against your contract up to the amount of the surrender value.
Sale: On the secondary market, you may achieve a price that is a few percentage points higher than the surrender value.
Before taking action, you should carefully examine the options so that the question “What do I get out of my life insurance?” does not end in disappointment. Your insurer's annual statement provides information about the current surrender value.
Profit participation: Your share of the insurer's success
The profit participation is a variable part of your payout. Insurers generate profits from capital investments, risk profits, and cost savings. As a policyholder, you participate in these profits. The amount is not guaranteed and is determined annually.
There are various types of profit participation in life insurance:
Bonus system: Increase of the guaranteed insurance benefit.
Interest accumulation: Profits are credited to an account and earn interest.
Premium offset: Profits reduce your ongoing premiums.
Terminal bonus: An additional amount that is due only at the end of the contract or in the event of death.
The legal basis for profit participation in Germany is § 153 of the Insurance Contract Act (VVG). This paragraph ensures that policyholders are appropriately involved in the profits and valuation reserves. For example, the average current interest rate of German life insurers in 2019 was approximately 2.34 percent. The various types of life insurance may have different regulations regarding profit participation.
Tax considerations: What remains from the gross
The question "What do I get from my life insurance?" is inextricably linked to the taxation of the payout. The rules are complex and depend on the date the contract was concluded. For contracts concluded by 31 December 2004 (old contracts), the returns are often tax-free. The prerequisite is usually a minimum term of twelve years and a contribution period of at least five years.
For contracts from 1 January 2005, the following applies: The returns (difference between payout and paid contributions) are taxable. As a rule, the withholding tax of 25 percent plus solidarity surcharge and, if applicable, church tax applies. A more favourable regulation (half-income method) applies if the contract has been in place for at least twelve years and the payout is made only after reaching the age of 60 (for contracts concluded from 2012: 62 years). In this case, only half of the returns have to be taxed at the personal income tax rate. Also find out how to declare the payout in your tax return or use a tax calculator for life insurance. Details on taxation of private life insurance are also important.
Our expert tip: Carefully check your tax certificate and accurately report the returns in your tax return to potentially receive refunds. For a payout of 55,000 euros with paid contributions of 45,000 euros, the return amounts to 10,000 euros, which may result in a withholding tax of 2,500 euros (excluding solidarity surcharge/church tax).
Payment options: Lump sum or lifetime annuity?
At the end of a contract, you often face the choice: a one-time capital payout or a lifelong pension. This decision has significant financial implications. A single payment provides immediate liquidity for larger purchases, such as a property or the repayment of loans. With a payout of, for example, €50,000, you have the flexibility to access the entire amount.
The lifelong pension, on the other hand, ensures a regular additional income in retirement, month after month. This can be particularly beneficial if the state pension is insufficient to maintain your standard of living. However, be aware that in the event of early death, any unpaid capital usually reverts to the insurer, unless a pension guarantee period has been agreed. A partial payout followed by the annuitisation of the remaining amount is sometimes also an option. The payout of a term life insurance, however, only occurs in the event of death and usually as a lump sum. Also clarify when term life insurance does not pay out.
Practical Example: Calculation of a Possible Payout
To make the question "What do I get from my life insurance?" more tangible, let's consider a simplified example. Suppose you have paid 100 euros monthly for 30 years, making a total of 36,000 euros. According to the contract, your guaranteed insurance sum is 40,000 euros.
Additionally, there is the surplus participation. Let's assume this amounts to an additional 8,000 euros over the term. Your total maturity benefit before taxes would then be 48,000 euros. The taxable profit would be 12,000 euros (48,000 euros - 36,000 euros). If the conditions for the half-income procedure are met, you would need to tax 6,000 euros at your personal tax rate. At a tax rate of 30 percent, that would be 1,800 euros in taxes. Therefore, your net payout would be 46,200 euros. This is a highly simplified representation; the actual calculation is more complex. The duration of payout following a death may vary.
Expert tips for your life insurance payout
More useful links
The Gesamtverband der Deutschen Versicherungswirtschaft (GDV) provides a detailed publication with current figures and facts about German life insurance in 2024.
On the website of the Gesamtverband der Deutschen Versicherungswirtschaft (GDV), you will find a comprehensive overview of statistics on life insurance within the German insurance industry.
The Finanzamt NRW offers detailed information on the tax regulations for income from life insurance policies as part of income from capital assets.
You can find an informative article about the tax aspects of life insurance on the platform Die Deutschen Versicherer, an initiative by the GDV.
FAQ
What affects the amount of my life insurance payout?
Several factors: the amount of your contributions, the contract term, the guaranteed interest rate, the insurer's earned surplus participation, and any costs or fees. In the event of early termination, the surrender value is crucial.
When will I receive the payout of my life insurance?
The payout is usually made at the contractually agreed maturity date (upon survival). For a term life insurance policy, the payout is made in the event of the insured person's death. In case of early cancellation, you will receive the surrender value.
What tax allowances are available on life insurance payouts?
For contracts established before 2005, earnings can be entirely tax-free under certain conditions. For more recent contracts, there are no specific allowances for earnings from life insurance itself, but the general saver allowance can be applied to capital gains. The rules for the partial taxation (half-income procedure) provide a tax relief.
Is it worth cancelling the life insurance policy?
A termination is often associated with financial losses, as the surrender value, especially in the first few years, can be lower than the contributions paid. Alternatives such as premium exemption, sale, or a policy loan should be considered. Around half of all life insurance policies are terminated prematurely.
How do I find out the current value of my life insurance?
Your insurer sends you an annual statement. This includes information about the guaranteed benefits, the current surrender value, and the development of profit sharing to date.
What happens to my life insurance when receiving citizens' income?
In certain circumstances, a life insurance policy may need to be terminated. However, there are protective mechanisms such as the exclusion from compulsory use or the uneconomical nature of termination (if the payout is more than ten percent below the contributions) that can prevent dissolution. Surrender values are then protected up to 750 euros per year of life.
