Private life insurance tax: optimising payouts and contributions
30.04.25
9
Minutes
Katrin Straub
Managing Director at nextsure
The taxation of private life insurance policies raises many questions. Whether your payout is tax-free or whether capital gains tax applies depends on the details. This article explains the rules and gives you practical recommendations.
The topic in brief and concise terms
Contracts taken out before 2005 are often tax-free on lump-sum payout if certain conditions (e.g. a term of twelve years, five years of premium payments) are met.
For contracts from 2005 onwards, capital gains tax applies to returns, unless the 12/60 or 12/62 rule for the half-income method applies.
Pension payments are always taxed on the individual taxable portion, the amount of which depends on the age at which the pension begins.
Understanding the tax basics of private life insurance
The taxation of your private life insurance depends on several factors. The key factor is the policy’s start date. For policies taken out before 1 January 2005, more favourable rules often apply. For more recent policies, the payout of the returns is generally taxable. The type of payout – as a lump sum or as an annuity – also plays a major role. It is important to know the differences between endowment life insurance policies and term life insurance policies. This distinction has a significant impact on the tax treatment. The complexity requires a careful review of your individual situation.
Old contracts (concluded before 2005): Secure often tax-free payouts
Did you take out your private life insurance before 1 January 2005? Then, under certain conditions, you can benefit from a tax-free payout. An important condition is a minimum contract term of twelve years. In addition, contributions must have been paid in for at least five years. The payout must be made as a lump sum in order to ensure tax exemption. Many old contracts meet these criteria and thus enable a tax-free return on capital. If the first contribution was made by 31 March 2005 at the latest, this is another positive sign. Check your contract documents carefully so as not to lose these advantages. A look at old insurance contracts can be worthwhile. These regulations offer a significant financial advantage for long-term savers.
New contracts (concluded from 2005): Use the flat-rate withholding tax and the half-income method
For private life insurance policies concluded from 1 January 2005 onwards, the tax landscape has changed. The returns from these contracts are generally subject to flat-rate withholding tax of twenty-five per cent. In addition, the solidarity surcharge and, where applicable, church tax are due. However, there is an important exemption, the so-called half-income method. To benefit from this, the following conditions must be met:
The contract must have been in force for at least twelve years.
The payout may only be made after reaching the age of sixty.
For contracts concluded from 2012 onwards, an age limit of sixty-two applies.
The payout is made as a lump sum.
If these requirements are met, only half of the returns must be taxed at the personal income tax rate. This can often be more favourable than the flat-rate withholding tax. The correct declaration in the tax return is crucial here. A precise calculation is worthwhile in any case. This rule can significantly reduce the tax burden.
Annuity payments from private life insurance: the taxation of the income element in detail
If you opt for a monthly pension payment from your private life insurance policy, taxation of the income portion applies. This applies regardless of the contract’s start date. In this case, not the entire pension is taxed, but only a specific income portion. The amount of this portion depends on your age when the pension starts. The older you are when you begin receiving the pension, the lower the taxable income portion. For example, if the pension starts at the age of sixty-five, the income portion is eighteen per cent. If the pension starts at the age of sixty-seven, it is only seventeen per cent. This income portion is then taxed at your personal income tax rate. Your insurer will calculate the exact amount for you. This information is important for your retirement planning. Taxation of the income portion is often more favourable than full taxation.
Life insurance premiums: What you can claim for tax purposes
Contributions to certain life insurance policies can be claimed as pension-related expenses in your tax return. This applies in particular to contributions to term life insurance policies. Contributions to endowment life insurance policies taken out before two thousand and five may also be deductible under certain circumstances. However, there are maximum limits for the special expense deduction. For employees and civil servants, this is one thousand nine hundred euros per year. Self-employed persons 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 insurance and long-term care insurance. A careful review is therefore essential. Information on the deductibility of unit-linked pension insurance policies may also be relevant here. Make use of all available options to reduce your tax burden.
Expert tips on tax optimisation for your private life insurance
To optimise the tax burden in connection with your private life insurance, there are several strategies. For new policies (from 2005), you should check the conditions for the half-income taxation method. A long term and a late payout can halve the tax burden. Our expert tip: with term life insurance, a “cross-over” policy taken out by partners can be sensible in order to avoid inheritance tax. In this case, each partner takes out a policy on the life of the other. In the event of a claim, the sum then passes to the beneficiary free of inheritance tax. Transferring a policy to a person with a lower income can also bring tax advantages in certain cases. This applies in particular if the conditions for the half-income taxation method are not met. A cancellation of private pension insurance should be carefully considered from a tax perspective. If in doubt, seek expert advice.
In the event of death, the payout of a life insurance policy can trigger inheritance tax. This depends on the amount of the sum insured and the beneficiary’s degree of relationship. 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 unrelated persons, the allowances are significantly lower, often only twenty thousand euros. The structure of the beneficiary designation in the insurance contract is crucial here. If a specific beneficiary is named, the sum insured does not form part of the estate, but it is still subject to inheritance tax. Careful planning can help minimise the tax burden for the surviving dependants. This is an important aspect of the insurance and tax planning.
Your path to the optimal tax structuring of your life insurance
The tax treatment of your private life insurance is a complex subject with many facets. Whether it is an old policy or a new policy, a lump-sum payout or an annuity – the details determine the amount of tax payable. A precise understanding of the rules and careful planning are essential. Make use of tax-optimisation options such as the half-income method or income portion taxation. Also consider the tax deductibility of contributions and the potential impact of inheritance tax. Individual advice can help you find the best solution for your situation. At nextsure, we are happy to help bring clarity to your insurance and tax situation. Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive specific optimisation suggestions.
More useful links
The Federal Ministry of Finance provides a document on tax incentives for private pension provision.
In Annex 22a/I of the 2022 Income Tax Guidelines 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 North Rhine-Westphalia tax office provides information on income from capital assets, in particular returns from endowment life insurance policies.
You can also find further information on benefits from private pension provision at the North Rhine-Westphalia tax office.
The Lower Saxony Consumer Advice Centre offers consumer information on endowment life insurance.
FAQ
What is the difference between flat-rate withholding tax and taxation on the income portion for life insurance policies?
Capital gains tax (25 % plus solidarity surcharge and, if applicable, church tax) is levied as a flat-rate charge on investment income from newer life insurance policies paid out as a lump sum. The earnings portion taxation applies to pension payments; here, only part of the pension (depending on age at the start of the pension) is taxed at the personal income tax rate.
What role does the policy commencement date play in the taxation of my life insurance policy?
The maturity date is crucial. Contracts before 1 January 2005 can, under certain conditions, be completely tax-free at payout. For contracts from this date onward, new rules apply with the returns generally being taxable.
What does the 12/62 rule mean in life insurance?
The 12/62 rule (or 12/60 rule for contracts concluded before 2012) makes it possible, for contracts concluded after 2004, to tax only half of the returns. The requirements are: a contract term of at least twelve years and payment only after reaching the age of 62 (or 60) as a lump sum.
Does income tax apply to the payout of a term life insurance policy?
No, the payout of a term life insurance policy upon death is exempt from income tax. However, it may be subject to inheritance tax in certain circumstances, depending on the beneficiary’s allowances.
How can I avoid inheritance tax on a life insurance policy?
One option is the “cross-insurance arrangement” between partners, in which each takes out a policy on the other’s life and is both the policyholder and the beneficiary. This means that, in the event of death, the benefit is paid directly and free of inheritance tax to the surviving partner, provided the allowances are not otherwise exceeded.
Do I have to declare my life insurance in my tax return?
Yes, income from life insurance policies that is taxable (e.g. in the case of new policies or if the conditions for tax exemption are not met for older policies) must be declared in the KAP schedule of the tax return. Deductible contributions also belong in the Vorsorgeaufwand schedule.
