Term life insurance for unmarried partners: Avoid tax pitfalls
26 Jan 2026
10
Minutes
Katrin Straub
CEO at nextsure
Unmarried couples enjoy few privileges under German inheritance law. Without the right protection, in the event of serious circumstances, not only is there the emotional loss, but also a significant financial burden due to inheritance tax.
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The topic in brief and concise terms
Make sure to use cross-assurance (Partner A insures Partner B) to avoid the inheritance tax of 30% on amounts over 20,000 euros.
Avoid joint life contracts as these are disadvantageous for tax purposes and only provide a one-time payout in the event of a serious situation.
Combine the insurance with a will, as term life insurance only covers the monetary benefit but does not regulate other inheritance (e.g., property).
The €20,000 Trap: Why Inheritance Law Disadvantages Unmarried Individuals
The biggest shock for many unmarried couples often comes only after the insurance payment: the tax office. While married partners are entitled to an inheritance tax allowance of 500,000 euros, for unmarried partners it is only 20,000 euros. Everything beyond this must be taxed. And here, too, the taxman is tougher: Unmarried couples fall into tax class III, which means that from the first euro over the allowance, a tax rate of at least 30 percent is due.
For an insurance sum of 300,000 euros to secure property, the calculation looks like this: If your partner dies and you are registered as the beneficiary in a standard policy, the calculation is as follows:
Insurance sum: 300,000 euros
Less allowance: 20,000 euros
Taxable amount: 280,000 euros
Tax rate (30%): 84,000 euros
In this scenario, you would have to pay 84,000 euros to the tax office. Money that was actually intended for paying off the loan or daily expenses. According to the Inheritance and Gift Tax Act (ErbStG), the payout of a life insurance policy is considered an acquisition due to death, provided the deceased was the policyholder. To prevent this, a clever contractual arrangement is necessary that legally categorizes the acquisition process differently.
The Crossover Model: The Solution for Maximum Tax Freedom
The solution to the problem described above is the so-called cross-cover insurance. Here, two separate contracts are concluded, where the roles of policyholder and insured person are swapped. The principle is simple but effective: you do not insure your own life for the benefit of your partner but instead insure your partner's life for your own benefit.
This is how cross-cover insurance works:
Contract 1: Partner A is the policyholder, payer, and beneficiary. The insured person is Partner B.
Contract 2: Partner B is the policyholder, payer, and beneficiary. The insured person is Partner A.
If Partner B passes away, Partner A receives the insurance sum from Contract 1. Since Partner A was the contracting party with the insurance and made the payments, the tax office does not consider the payout as an inheritance, but rather as a benefit from their own contract. The amount is thus transferred completely tax-free to Partner A, regardless of the sum. This approach is the only legally secure method to transfer large sums without deductions.
Two separate contracts also provide flexibility in the event of a separation. Each partner can individually cancel their contract, make it premium-free, or theoretically even adjust the insured person (subject to a new health examination) if supported by the insurer.
Connected Lives vs. Individual Contracts: A Comparison
Insurers often offer what's known as a joint term life insurance policy. In this arrangement, both partners are insured under a single contract. If one of the partners dies, the sum is paid out and the contract ends. The seemingly cost-effective solution is usually the worst choice for unmarried couples.
With a joint life insurance policy, the tax issue persists because it is often unclear to whom each share of the premium payment can be allocated in the event of a claim. Additionally, the sum is only paid out once. If both partners die simultaneously (for example, in an accident), the survivors (e.g. children) receive only the single insurance sum. However, with two individual policies, the double sum would be available, which is essential for the security of children.
The right sum insured: How much protection is necessary?
The optimal insurance amount is crucial for protecting dependents. A sum that is too low leaves dependents in a financial gap, whereas a sum that is too high leads to unnecessarily high premiums. As a general rule, the amount should often be three to five times the gross annual income. For precise planning, consider these factors:
Property loans: The outstanding balance of the loan should be covered 100%.
Children: You should plan an additional €50,000 to €100,000 per child to cover education and living costs until they reach adulthood.
Ongoing costs: Consider fixed costs such as rent, insurance, and leasing rates, which the surviving partner will have to bear alone.
Funeral costs: A dignified funeral in Germany costs an average of between €8,000 and €13,000.
A specific scenario: A couple with one child and a home loan of €250,000 should aim for an amount of at least €400,000 per person. At nextsure, we allow you to adjust these amounts flexibly to your life phase. Thanks to options for increasing coverage, you can often enhance protection without a renewed health check upon events like the birth of a child or purchasing a home.
Common Mistakes and Legal Pitfalls
Besides taxes, there are other aspects that unmarried couples often overlook. A missing or incorrectly formulated beneficiary designation is a critical error. In term life insurance, you specify who should receive the money in the event of death. Here, we distinguish between revocable and irrevocable beneficiary designations.
With a revocable beneficiary designation, the policyholder can change the beneficiary at any time without asking them. In contrast, with an irrevocable beneficiary designation, the beneficiary already has a fixed entitlement that cannot be taken away without their consent. For partners, an irrevocable beneficiary designation offers greater security, but it can become problematic in the event of a messy breakup.
In addition to insurance, a will is necessary. Term life insurance only regulates the payout of the insurance sum. However, anyone who wants their partner to inherit the shared house or other assets must explicitly state this in a will. Without a will, statutory inheritance rules apply, and for unmarried couples, this means: The partner ends up with nothing, while the deceased's parents or siblings become the heirs. In the worst-case scenario, this could mean the surviving partner has to sell the house to pay off the co-heirs.
Digital und sicher: Why nextsure is your partner
At nextsure, we have digitalised the process of term life insurance without neglecting personal expertise. Within minutes, you will gain clarity on your needs and the costs involved.
We actively support you in designing cross-insurance solutions. While many traditional platforms typically offer only individual policies for the person's own risk, we guide you specifically through the tax-optimised variant. For us, transparency also means making the health questions as simple and understandable as possible, so you do not make any mistakes that could later jeopardise your insurance cover.
More useful links
Haufe: Inheritance tax on life insurance offers information on this topic.
FAQ
Why is cross-protection better than a joint contract?
A joint policy (joint lives) pays out only once and can be problematic for tax purposes, as the payout is often attributed to inheritance. Two individual policies taken out on a cross-basis provide double security (payout on the death of both partners) and are completely tax-free for unmarried couples.
Do I need to report the payout to the tax office?
Insurance companies are legally required to report payouts in the event of death to the tax office. However, if you use the cross model, you can prove to the tax office that you were the policyholder yourself, thus no inheritance tax is incurred.
What happens to the insurance during a separation?
As these are two separate contracts, each partner can individually terminate or suspend their contract. Alternatively, the policyholder can be changed, although this may have tax implications and requires a new assessment.
Is a term life insurance policy enough to keep the partner in the house?
The insurance provides the necessary capital to repay loans. However, without an additional will, the partner does not have a legal right of inheritance to the house itself. They would need to deal with the statutory order of succession (e.g., the deceased's parents).
How do pre-existing conditions affect the conclusion?
Pre-existing conditions must be truthfully disclosed in the health questions. They can lead to risk surcharges or, in rare cases, rejection. nextsure helps you answer the questions correctly to ensure your coverage is not compromised in the event of a claim.
