Private Life Insurance Tax: Optimally Structuring Payouts and Contributions
30 Apr 2025
4
Minutes
Katrin Straub
CEO at nextsure
The taxation of private life insurance raises many questions. Whether your payout is tax-free or subject to capital gains tax depends on the details. This article explains the rules and provides you with specific action recommendations.
The topic in brief and concise terms
Contracts established before 2005 are often tax-free upon capital payout, provided certain conditions are met (e.g., a term of twelve years, contributions paid for five years).
For contracts from 2005 onwards, capital gains tax is levied on income unless the 12/60 or 12/62 rule for the half-income method applies.
Pension payments are always taxed based on the individual yield portion, the amount of which depends on the age at the start of the pension.
Understanding the tax fundamentals of private life insurance
The taxation of your private life insurance depends on several factors. What is crucial is primarily the contract's conclusion date. For contracts concluded before the first of January two thousand five, often more favourable regulations apply. For newer contracts, the payout of earnings is generally taxable. The method of payment – whether as a lump sum or as an annuity – also plays a significant role. It is essential to know the differences between endowment life insurance policies and term life insurance policies. This distinction significantly affects the tax treatment. The complexity requires a thorough examination of your individual situation.
Old contracts (concluded before 2005): Often secure tax-free payouts
Did you finalize your private life insurance before the first of January two thousand and five? Then you may benefit from a tax-free payout under certain conditions. An important requirement is a minimum contract term of twelve years. Additionally, contributions must have been paid for at least five years. The payout must be made as a lump sum to ensure tax exemption. Many old contracts meet these criteria, thereby enabling a tax-free capital gain. If the first contribution was made by the thirty-first of March two thousand and five, this is another positive indicator. Check your contract documents carefully to not lose these advantages. A look into old insurance policies can be worthwhile. These regulations offer a significant financial benefit for long-term savers.
New contracts (concluded from 2005): Utilize the final withholding tax and the half-income method
For private life insurance policies taken out from the first of January two thousand and five, the tax landscape has changed. The income from these contracts is generally subject to the capital gains tax of twenty-five percent. Additionally, the solidarity surcharge and, if applicable, the church tax are added. However, there is an important exception, the so-called half-income procedure. To benefit from this, the following conditions must be met:
The contract must have run for at least twelve years.
Payout must occur only after completion of the sixtieth year of life.
For contracts concluded after two thousand and twelve, an age limit of sixty-two years even applies.
The payout is made as a lump sum.
If these requirements are met, only half of the income needs to be taxed at the personal income tax rate. This can often be more favourable than the flat-rate capital gains tax. The correct entry in the tax return is crucial here. A precise calculation is worthwhile in any case. This regulation can significantly reduce the tax burden.
Pension payments from private life insurance: The taxation of the income portion in detail
If you opt for a monthly pension payment from your private life insurance, the partial income tax method applies. This holds regardless of the contract's date of conclusion. Not the entire pension is taxed, but only a specific income portion. The amount of this portion depends on your age at the start of the pension. The older you are at the beginning of the pension, the lower the taxable income portion. For instance, if the pension begins at the age of sixty-five, the income portion is eighteen percent. If it starts at sixty-seven, it's only seventeen percent. This income portion is then taxed according to your personal income tax rate. Your insurer will calculate this precisely for you. This information is important for your retirement planning. The partial income tax method is often more advantageous than full taxation.
Life insurance contributions: What you can claim for tax purposes
Contributions to certain life insurance policies can be claimed as special expenses in your tax return. This particularly applies to contributions to term life insurance. Contributions to endowment life insurance policies taken out before 2005 may also be deductible under certain circumstances. However, there are maximum amounts for special expense deductions. For employees and civil servants, this is one thousand nine hundred euros per year. Self-employed individuals can claim up to two thousand eight hundred euros. It is important to note that these maximum amounts are often already exhausted by contributions to health and nursing care insurance. A thorough examination is therefore essential. Information on the deductibility of unit-linked pension insurance may also be relevant here. Take advantage of all opportunities to reduce your tax burden.
Expert tips for optimizing the tax aspects of your private life insurance
To optimise the tax burden associated with your private life insurance, there are several strategies. For new contracts (from 2005 onwards), you should check the conditions for the half-income procedure. A long term and late payout can halve the tax burden. Our expert tip: For term life insurance, a "cross contract" by partners can be worthwhile to avoid inheritance tax. In this case, each partner takes out insurance on the life of the other. In the event of a claim, the sum is transferred to the beneficiary free of inheritance tax. Transferring a contract to a person with a lower income can also offer tax advantages in certain cases. This is particularly true if the conditions for the half-income procedure are not met. A cancellation of private pension insurance should be carefully considered from a tax perspective. Seek professional advice if in doubt.
Special Case Inheritance Tax: What to Consider with Life Insurance in the Event of Death
In the event of death, a life insurance payout may trigger inheritance tax. This depends on the sum insured and the degree of relationship of the beneficiary. Different allowances apply. Spouses and registered partners have an allowance of five hundred thousand euros. Children can inherit up to four hundred thousand euros tax-free. For non-related persons, the allowances are significantly lower, often only twenty thousand euros. The arrangement of the beneficiary clause in the insurance policy is crucial here. If a specific beneficiary is named, the insurance sum is not included in the estate but is subject to inheritance tax. Careful planning can help minimise the tax burden for the bereaved. This is an important aspect of insurance and tax planning.
Your path to optimal tax planning for your life insurance
More useful links
The Federal Ministry of Finance offers a document on tax incentives for private retirement provision.
In Appendix 22a/I of the Income Tax Guidelines 2022 of the Federal Ministry of Finance, you will find detailed information on retirement income.
The German Pension Insurance provides a brochure with information on tax law for insured persons and pensioners.
The NRW Tax Office provides information on income from capital assets, particularly proceeds from capital life insurance.
Further information on benefits from private retirement provision can also be found at the NRW Tax Office.
The Consumer Center Lower Saxony offers consumer information on capital life insurance.
FAQ
What is the difference between flat-rate withholding tax and income portion taxation in life insurance?
Capital gains tax (25% plus solidarity surcharge and possibly church tax) is applied at a flat rate to capital income from newer life insurance policies with a lump sum payment. The earnings component taxation applies to annuity payments; here, only part of the pension (depending on the age at the start of the pension) is taxed at the personal income tax rate.
What role does the end date play in the taxation of my life insurance policy?
The completion date is crucial. Contracts concluded before 1 January 2005 may be completely tax-free upon payout under certain conditions. For contracts from this date onwards, new rules apply with a general tax liability on earnings.
What does the 12/62 rule mean in life insurance?
The 12/62 rule (or 12/60 rule for contracts concluded before 2012) allows for only half of the profits to be taxed for contracts concluded after 2004. The requirements are: a contract term of at least twelve years and a lump sum payout only after reaching the age of 62 (or 60).
Is income tax payable on the payout of a term life insurance policy?
No, the payout of a term life insurance policy in the event of death is income tax-free. However, it may be subject to inheritance tax depending on the beneficiary's allowances.
How can I avoid inheritance tax on a life insurance policy?
One option is the "cross-endowment" between partners, where each takes out a policy on the life of the other and is both the policyholder and beneficiary. In the event of death, the benefit is paid directly and inheritance tax-free to the surviving partner, provided the allowances are not exceeded in other ways.
Do I need to include my life insurance in the tax return?
Yes, returns from life insurance policies that are taxable (e.g., for new contracts or when the conditions for tax exemption for old contracts are not met) must be declared in the KAP annex of the tax return. Deductible contributions also belong in the pension expenses annex.
