Term life insurance and taxes: How to optimise your tax burden
27 May 2025
11
Minutes
Katrin Straub
CEO at nextsure
The tax aspects of a term life insurance policy are often complex. Learn how to optimally claim contributions and minimize the tax burden upon payout. This article highlights all important regulations and provides practical tips.
The topic in brief and concise terms
Contributions to term life insurance are tax-deductible as other provision expenses, but are often limited by caps for health and long-term care insurance.
The payout from a term life insurance is exempt from income tax, but may trigger inheritance tax depending on personal allowances and contract arrangements.
With a cross-term life insurance policy, inheritance tax on the payout can often be completely avoided, which is particularly beneficial for unmarried couples.
Overview: Tax Treatment of Term Life Insurance
Term life insurance plays an important role in protecting your loved ones. Premiums can be claimed for tax purposes under certain conditions. The payout sum is generally exempt from income tax but may be subject to inheritance tax.
Pay attention to the maximum allowances for pension expenses of up to 2,800 euros for the self-employed. Careful contract design can significantly reduce the tax burden. Knowing the allowances is an important first step.
Deducting the premiums for term life insurance for tax purposes
You can declare the contributions to your term life insurance as other pension expenses in the retirement provision section of your tax return. This is regulated in Paragraph 10 of the Income Tax Act (EStG). For employees and civil servants, a maximum amount of 1,900 euros per year applies.
Self-employed individuals can even claim up to 2,800 euros. For jointly assessed married couples, these amounts double to 3,800 euros and 5,600 euros, respectively. However, these maximum amounts are often already exhausted by contributions to health and long-term care insurance. Nevertheless, it is worthwhile to include it in the tax return for insurance.
The following points are relevant for deductibility:
Entry in the retirement provision section (line 50).
Proof through an annual contribution certificate from the insurer.
Priority given to health and long-term care insurance contributions.
Applies to contracts where benefits are only paid in the event of death.
Careful examination of your individual situation is crucial for a possible tax saving.
Taxes when cashing out a risk life insurance: Income tax and inheritance tax
First, some good news: The payout from a term life insurance policy is exempt from income tax in Germany. This applies regardless of the insurance amount. It is a different situation with inheritance tax, which may apply to the payout from the term life insurance.
The amount of inheritance tax depends on several factors:
The degree of relationship between the deceased and the beneficiary.
The total estate value (including the insurance amount).
The beneficiary's personal tax allowances.
The tax class of the beneficiary.
For unmarried couples, the tax allowances are significantly lower at 20,000 euros compared to 500,000 euros for spouses or 400,000 euros for children. This can quickly lead to a considerable tax burden. A well-considered private life insurance tax planning is therefore essential.
Understanding Allowances and Tax Classes in Inheritance Tax
Inheritance tax becomes relevant when the sum insured, together with the rest of the inheritance, exceeds the legal allowances. Spouses and registered civil partners have an allowance of 500,000 euros. Children can inherit 400,000 euros tax-free, grandchildren 200,000 euros (provided their parents are still alive).
For unmarried partners, siblings, or friends, an allowance of only 20,000 euros applies. The tax class depends on the degree of kinship. Spouses and children fall into tax class one with the lowest tax rates, starting at seven percent. Unmarried partners often fall into tax class three with rates starting at 30 percent. A term life insurance policy for family protection should consider these aspects.
Our expert tip: Check the current allowances and tax classes carefully, as they can change. Professional advice can provide clarity here.
Options for reducing inheritance tax
There are legal ways to minimise or completely avoid inheritance tax on the payout of a term life insurance policy. A particularly effective method is the so-called cross-term life insurance. In this case, two partners each take out a policy on the life of the other. The policyholder is simultaneously the premium payer and the beneficiary.
In the event of a claim, the policyholder receives the sum from their own policy, not as an inheritance. As a result, no inheritance tax is due. This arrangement is particularly interesting for unmarried couples or wealthy married couples whose allowances have already been fully utilised by other assets. It is important that the premiums are actually paid from the account of the respective policyholder. Another option is the joint term life insurance, where, in the event of the death of one partner, only half of the insurance sum is subject to inheritance tax (taking into account the allowances).
Advantages of cross insurance:
No inheritance tax in the event of a claim (except in case of simultaneous death).
Useful for unmarried couples with a low allowance of 20,000 euros.
Suitable for wealthy married couples to preserve the allowances.
Clear separation of payment streams is crucial.
These strategies require careful planning and coordination.
Expert tips on term life insurance and taxes
To make the most of the tax advantages of your term life insurance and avoid pitfalls, please consider the following tips. Our expert advice: Have your policies reviewed regularly, about every five years. Life circumstances and tax laws can change. Adjustments to the insurance amount or contract design may become necessary.
Carefully document all premium payments for your insurance details in the tax return. In the case of a cross-insurance, it is crucial that each partner pays the premiums for their policy from their own account to avoid issues with the tax office. Early planning, ideally at the time of contract signing, is key to tax optimization. Also, consider the appropriateness of a term life insurance policy in your specific situation.
Special Case: Joint Risk Life Insurance and Taxes
The connected term life insurance is a policy where two people jointly enter into a contract. Both are simultaneously policyholders, the insured, and beneficiaries. If one of the partners dies, the surviving partner receives the agreed insurance amount. For tax purposes, often only half of the payout amount is subject to inheritance tax, provided allowances are exceeded.
An example: With an insurance amount of 200,000 euros, 100,000 euros would be taxed if the allowance of the inheriting spouse (500,000 euros) has already been used up by other assets. This option can be suitable for married couples, but is often less ideal for couples with children than two separate policies or a cross-construction. If both partners die simultaneously, the children only receive the insurance amount once. The general regulations on insurance and tax must also be observed here.
Conclusion and Recommendations: Optimize Term Life Insurance for Tax Efficiency
More useful links
The Federal Ministry of Finance provides official documents and information on income tax regulations.
The Federal Statistical Office (Destatis) publishes current press releases, such as the 'Number of the Week'.
Further information on deaths and life expectancy can be found at the Federal Statistical Office (Destatis).
The German Insurance Association (GDV) offers a publication with up-to-date figures on German life insurance.
A comprehensive overview of statistics on the German insurance industry can also be found at the German Insurance Association (GDV).
The German Pension Insurance provides statistics and reports on pension issues.
Haufe offers specialist articles on the income tax treatment of endowment life insurance and capital payouts.
FAQ
Can I deduct term life insurance premiums from my taxes?
Yes, contributions to term life insurance can be claimed as other provident expenses for tax purposes. However, the maximum amounts (e.g., 1,900 euros for employees) are often already exhausted by health and long-term care insurance contributions.
What taxes are incurred when a term life insurance policy is paid out?
The payout amount is exempt from income tax. However, inheritance tax may be incurred if the insurance sum exceeds the beneficiary's allowances.
What are the tax-free allowances for inheritance tax on benefits from a term life insurance policy?
The allowances are staggered: 500,000 euros for spouses, 400,000 euros for children, 200,000 euros for grandchildren, and 20,000 euros for unmarried partners or siblings.
What is the advantage of a cross-risk term life insurance policy in terms of tax?
The main advantage is the avoidance of inheritance tax. Since the policyholder receives the benefit from their own contract (the partner's life is insured), the payout is not considered an inheritance.
Do I have to pay inheritance tax on a joint term life insurance policy?
In the event of the death of a partner under a joint term life insurance policy, often only half of the insured sum is subject to inheritance tax, provided the allowances of the surviving partner are exceeded.
Where can I find the entries for term life insurance in the tax return?
The contributions are entered under „Other pension expenses“ in the section for pension expenses, typically in line 50.
