Life Insurance Payout: How to Maximise Your Return
17.05.25
3
Minutes
Katrin Straub
Managing Director at nextsure
Many policyholders ask themselves: life insurance — what will I receive from it? The answer depends on the policy details, the term and the type of payout. Find out here how to assess your payout amount correctly 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 portions and surpluses; if you cancel it, there is the often lower surrender value.
For tax purposes, older contracts (before 2005) are generally tax-advantaged, while newer contracts are subject to capital gains tax (25% on returns) or the half-income method.
You can choose between a lump-sum payment and a pension; early termination is usually associated with financial disadvantages, and alternatives should be considered.
Payout amount of your life insurance: The key facts
Key takeaways on the payout
The payout amount of your life insurance consists of guaranteed benefits and possible surplus payments.
If you cancel early, you receive the surrender value, which is often below the premiums paid; around 50 per cent of policies are cancelled early.
Taxation of the payout depends on the contract start date: older contracts (before 2005) are often tax-free, while newer ones are subject to capital gains tax of 25 per cent on the returns.
You usually have the choice between a one-off lump-sum payment or a lifelong annuity.
The question “How much will I get from my life insurance?” concerns many policyholders, often years before the actual end of the contract. The actual sum depends on numerous factors, which we explain in detail below. A precise understanding of these aspects is crucial for your financial planning.
Understanding maturity benefits: What you normally receive
The regular payout at the end of the contract term is called the maturity benefit. This sum is the core of what you receive from your life insurance policy. It typically consists of several components that have been built up over decades.
The guaranteed maturity benefit is based on the savings portions of your contributions and the guaranteed interest rate applicable when the policy was taken out. For policies taken out before 2000, this guaranteed interest rate could be as high as four per cent. For policies concluded between July 2000 and the end of 2003, it was often 3.25 per cent.
In addition to the guaranteed sum, profit participation bonuses are added. These are not guaranteed and depend on the insurer’s financial performance. The differences between pension and life insurance may be relevant here. The maturity benefit can be paid out as a lump sum or as an annuity. This decision has a significant impact on your financial flexibility in later life.
Early termination: the surrender value as the payout basis
If you cancel your life insurance policy early, you receive the so-called surrender value. This figure is often a painful point, as it is frequently lower than the sum of the contributions paid in, especially in the first policy years. One reason for this is the initial and administration costs, which are deducted at the start.
The surrender value consists of the accumulated premiums minus risk cover and costs, plus any bonuses already credited. For unit-linked policies, the surrender value corresponds to the current value of the fund units. Many policyholders underestimate the financial losses of an early cancellation; up to 35 per cent cancel because they can no longer afford the premiums.
Alternatives to cancelling can include:
Premium pause: The contract continues without further premium payments, and the sum insured is reduced. Find out more about making an endowment life insurance policy paid-up.
Policy loan: You borrow against your policy 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 you act, you should examine the options carefully, so that you do not have to answer the question “How much will I get out of my life insurance?” with disappointment. Your insurer’s annual statement provides information on the current surrender value.
Surplus participation: your share in the insurer’s success
Profit participation is a variable component of your payout. Insurers generate surpluses from investments, risk profits and cost savings. As a policyholder, you share in these surpluses. The amount is not guaranteed and is determined מחדש each year.
There are various types of surplus allocation in life insurance:
Bonus system: increase in the guaranteed insurance benefit.
Interest-bearing accumulation: surpluses are credited to an account and earn interest.
Contribution offsetting: surpluses reduce your ongoing premiums.
Terminal surplus: an additional amount that only becomes due at the end of the contract or upon death.
The legal basis for profit participation in Germany is Section 153 of the Insurance Contract Act (VVG). This section ensures that policyholders are appropriately involved in the surpluses and valuation reserves. The average ongoing interest rate of German life insurers, for example, was around 2.34 per cent in 2019. The various types of life insurance may have different rules on profit participation.
Tax aspects: What remains of gross
The question “What do I get from a life insurance policy?” is inseparably linked to the taxation of the payout. The rules are complex and depend on the contract start date. For contracts concluded up to 31 December 2004 (old contracts), the returns are often tax-free. A minimum term of twelve years and a contribution payment period of at least five years is usually required.
For contracts from 1 January 2005 onwards, the following applies: the returns (the difference between the payout and the contributions paid in) are taxable. As a rule, withholding tax of 25 per cent plus the solidarity surcharge and, where applicable, church tax is payable. A more favourable rule (the half-income method) applies if the contract ran for at least twelve years and the payout takes place only after reaching the age of 60 (for contracts concluded from 2012 onwards: 62). In that case, only half of the returns must be taxed at the personal income tax rate. Also find out how to declare the payout in your tax return or use a life insurance tax calculator. Details on tax on private life insurance policies are also important.
Our expert tip: check your tax certificate carefully and declare the returns correctly in your tax return in order to receive any possible refunds. With a payout of 55,000 euros and contributions paid in of 45,000 euros, the return is 10,000 euros, on which 2,500 euros of withholding tax (excluding solidarity surcharge/church tax) may be due.
Payout options: lump sum or lifetime annuity?
When your contract matures, you are often faced with a choice: a one-off capital payment or a lifelong annuity. The decision has far-reaching financial consequences. A lump sum provides immediate liquidity for major purchases, for example a property or paying off loans. With a payout of, for example, EUR 50,000, you can use the entire amount flexibly.
By contrast, a lifelong annuity secures you a regular additional income in retirement, month after month. This can be particularly useful if the state pension is not enough to maintain your standard of living. Bear in mind, however, that if you die early, the unused capital normally goes to the insurer, unless a guaranteed annuity period has been agreed. A partial payment followed by annuitisation of the remaining balance is sometimes also an option. The pay-out of a term life insurance policy, by contrast, is only made in the event of death and is usually paid as a lump sum. Also find out when a term life insurance policy does not pay out.
To make the question “life insurance: what do I get out of it?” more tangible, let’s look at a simplified example. Suppose you paid in €100 per month for 30 years, i.e. a total of €36,000. According to the contract, your guaranteed sum insured is €40,000.
In addition, there is the profit participation. Let’s assume this amounts to an extra €8,000 over the term. Your total maturity benefit before tax would then be €48,000. The taxable return would be €12,000 (€48,000 - €36,000). If the conditions for the half-income method are met, you would have to pay tax on €6,000 at your personal tax rate. At a tax rate of 30 per cent, that would mean €1,800 in tax. Your net payout would therefore be €46,200. This is a highly simplified illustration; the actual calculation is more complex. The payout period after a death can vary.
Expert tips for your life insurance payout
To make the most of your life insurance, you should bear a few points in mind. Inform your insurer in good time of any changes to your bank details, especially for dormant policies. For policies with a withdrawal phase, you must actively request the payout yourself if you need the money before the end of the phase.
Our expert tip: Compare the guaranteed payout stated in your annual policy statement with the original projections. Due to falling interest rates over the past 20 years, actual payouts often differ from the model calculations of the time. Therefore, base your calculations primarily on the guaranteed amount. If anything is unclear or your policy situation is complex, professional advice may be worthwhile. At nextsure, we will be happy to help you analyse your individual situation.
Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive specific suggestions for optimisation.
More useful links
The Gesamtverband der Deutschen Versicherungswirtschaft (GDV) provides a detailed publication with current figures and facts on 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 provides detailed information on the tax rules for returns from capital life insurance policies as part of income from capital assets.
You can find an informative article on the tax aspects of life insurance on the platform Die Deutschen Versicherer, an initiative of 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 surplus participation, and any costs or fees. In the event of early cancellation, the surrender value is decisive.
When will I receive the payout from my life insurance?
The payout is generally made on the contractually agreed maturity date (survival benefit). In the case of term life insurance, the payout is made upon the death of the insured person. If the policy is cancelled early, you will receive the surrender value.
What tax allowances are there for life insurance payouts?
For contracts taken out before 2005, there is complete tax exemption for the returns under certain conditions. For newer contracts, there are no specific allowances for the returns on the life insurance itself, but the general saver’s allowance can be offset against capital gains. The rules on half taxation (half-income procedure) represent a tax relief.
Is it worth cancelling a life insurance policy?
Cancellation is often associated with financial losses, as the surrender value, especially in the first few years, can be lower than the contributions paid in. Alternatives such as paid-up insurance, selling the policy or a policy loan should be considered. Around half of all life insurance policies are cancelled early.
How can I find out the current value of my life insurance policy?
Your insurer sends you an annual statement. This contains information about the guaranteed benefit, the current surrender value and the previous development of surplus participation.
What happens to my life insurance if I claim citizens' allowance?
Under certain circumstances, an endowment life insurance policy must be surrendered. However, there are protective mechanisms such as an exclusion from disposal or the economic unreasonableness of cancellation (if the payout is more than ten per cent below contributions), which can prevent surrender. Surrender values of up to 750 euros per year of life are then protected.
