Term life insurance and tax: How to optimise your tax burden
27.05.25
6
Minutes
Katrin Straub
Managing Director at nextsure
The tax aspects of term life insurance are often complex. Find out how you can claim premiums to best advantage and minimise the tax burden when the benefit is paid out. This article explains all the important regulations and offers practical tips.
The topic in brief and concise terms
Contributions to term life insurance are tax-deductible as other allowable precautionary expenses, but are often capped by maximum limits for health and long-term care insurance.
The payout of a term life insurance policy is exempt from income tax, but may trigger inheritance tax, depending on allowances and policy structure.
By using a cross-owned term life insurance policy, inheritance tax on the payout can often be completely avoided, which is particularly advantageous for unmarried couples.
Overview: Tax treatment of term life insurance
Term life insurance plays an important role in protecting your loved ones. Contributions can be claimed for tax purposes under certain conditions. The payout is generally exempt from income tax, but may be subject to inheritance tax.
Please note the maximum amounts for pension expenses of up to 2,800 euros for self-employed persons. A carefully drafted contract can significantly reduce the tax burden. Knowing the allowances is an important first step.
Deduct contributions to term life insurance for tax purposes
You can declare the premiums for your term life insurance as other pension expenses in the pension expenses schedule of your tax return. This is regulated in Section 10 of the Income Tax Act (EStG). [,] For employees and civil servants, the annual maximum amount is EUR 1,900.
Self-employed individuals can even claim up to EUR 2,800. For married couples filing jointly, these amounts double accordingly to EUR 3,800 or EUR 5,600. However, these maximum amounts are often already used up by contributions to health and long-term care insurance. Nevertheless, it is worth including them in the tax return for insurance.
The following points are relevant for deductibility:
Entry in the pension expenses schedule (line 50).
Proof provided by the insurer's annual premium certificate.
Primary consideration is given to health and long-term care insurance contributions.
Applies to contracts where the benefit is paid only in the event of death. [,]
A careful review of your individual situation is crucial here for any potential tax savings.
Taxes on payout of term life insurance: income tax and inheritance tax
First the good news: the payout from term life insurance is exempt from income tax in Germany. This applies regardless of the amount insured. The situation is different for inheritance tax, which may be levied on the payout from the term life insurance policy.
The amount of inheritance tax depends on several factors:
The relationship between the deceased and the beneficiary.
The amount of the total estate (including the sum insured).
The beneficiary's personal allowances.
The beneficiary's tax class.
For unmarried couples, the allowances are significantly lower at 20,000 euros than for spouses (500,000 euros) or children (400,000 euros). This can quickly lead to a substantial tax burden. Well-thought-out private life insurance tax planning is therefore essential.
Understanding allowances and tax classes for inheritance tax
Inheritance tax becomes relevant when the sum insured plus the rest of the estate exceeds the statutory tax-free allowances. Spouses and registered civil partners have an allowance of EUR 500,000. Children can inherit EUR 400,000 tax-free, grandchildren EUR 200,000 (provided their parents are still alive).
For unmarried partners, siblings or friends, the allowance is only EUR 20,000. The tax class depends on the degree of relationship. Spouses and children fall into tax class one with the lowest tax rates, starting at seven per cent. Unmarried partners often fall into tax class three with tax rates from 30 per cent. A term life insurance policy for family protection should take these aspects into account.
Our expert tip: Check the current allowances and tax classes carefully, as these can change. Professional advice can bring clarity here.
Structuring 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 policy. Here, 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 used up by other assets. It is important that the premiums are actually paid from the account of the respective policyholder. Another option is the linked term life insurance policy, in which, in the event of one partner’s death, only half of the sum insured is subject to inheritance tax (taking allowances into account).
Advantages of the cross-policy arrangement:
No inheritance tax in the event of a claim (except in the event of simultaneous death).
Makes sense for unmarried couples with a low allowance of 20,000 euros.
Suitable for wealthy married couples to preserve allowances.
Clear separation of payment flows is crucial.
These strategies require careful planning and coordination.
Expert tips on term life insurance and tax
To make the most of the tax advantages of your term life insurance and avoid pitfalls, please note the following points. Our expert tip: have contracts reviewed regularly, for example every five years. Life circumstances and tax laws can change. An adjustment to the sum insured or the contract structure may become necessary.
Document all premium payments carefully for your insurance details in your tax return. In the case of cross insurance, it is crucial that each partner pays the premiums for their own policy from their own account to avoid problems with the tax office. Early planning, ideally at the time of contract conclusion, is the key to tax optimisation. Also consider the merits of a term life insurance policy in your specific situation.
Joint term life insurance is a policy in which two people take out a contract together. Both are simultaneously policyholders, the insured person and beneficiaries. If one partner dies, the surviving partner receives the agreed sum assured. For tax purposes, often only half of the payout amount is subject to inheritance tax, provided allowances are exceeded.
For example: With a sum assured of 200,000 euros, 100,000 euros would have to be taxed if the allowance of the inheriting spouse (500,000 euros) has already been used up by other assets. This option can be an alternative for married couples, but for couples with children it is often less suitable than two separate policies or a cross-insurance arrangement. If both partners die at the same time, the children receive the sum assured only once. The general rules on insurance and tax also apply here.
Conclusion and recommendation: optimising term life insurance for tax purposes
The tax treatment of term life insurance offers scope for planning both in respect of premiums and the payout. While premiums can only be deducted to a limited extent, the payout is at least exempt from income tax. The greatest challenge is often inheritance tax, which can, however, be avoided through clever policy structuring, such as cross-insurance. This requires a precise analysis of your personal and financial situation.
Take the opportunity of personalised advice to structure your cover optimally and avoid unnecessary tax burdens. Careful planning not only provides financial security for your loved ones, but also protects their assets in the event of a claim. Knowledge of the tax deductibility of insurance policies is an important building block of your financial planning.
Request an individual risk analysis now: Have your insurance situation checked free of charge and receive specific recommendations for optimisation.
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 'Figure 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 current 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 matters.
Haufe offers specialist articles on the income tax treatment of endowment life insurance policies and lump-sum payouts.
FAQ
Can I claim tax relief on premiums for term life insurance?
Yes, contributions to term life insurance can be claimed for tax purposes as other insurance-related expenses. However, the maximum amounts (e.g. EUR 1,900 for employees) are often already used up by health and long-term care insurance contributions.
What taxes are due on the payout of a term life insurance policy?
The payout amount is exempt from income tax. However, inheritance tax may apply if the insurance sum exceeds the beneficiary's tax-free allowance.
What are the allowances for inheritance tax on benefits from a term life insurance policy?
The allowances are tiered: for spouses €500,000, for children €400,000, for grandchildren €200,000 and for unmarried partners or siblings €20,000.
What is the tax advantage of a cross life insurance policy?
The main advantage is the avoidance of inheritance tax. As the policyholder receives the benefit from their own contract (the partner’s life is insured), the payout is not treated as an inheritance.
Do I have to pay inheritance tax on a linked term life insurance policy?
In a joint term life insurance policy, in the event of the death of one partner, often only half of the insured sum is subject to inheritance tax, provided the surviving partner's allowances are exceeded.
Where can I find the premiums for term life insurance in the tax return?
The contributions are entered in the annex for precautionary expenses under “Other precautionary expenses”, typically in line 50.
