Term life insurance for unmarried partners: avoiding tax pitfalls
26.01.2026
10
Minutes
Katrin Straub
Managing Director at nextsure
Unmarried couples enjoy very few privileges under German inheritance law. Without the right safeguards, in the worst case there is not only emotional loss, but also a significant financial burden due to inheritance tax.
Topics on this page
The topic in brief and concise terms
Be sure to use cross-insurance (Partner A insures Partner B) to avoid inheritance tax of 30% on amounts over 20,000 euros.
Avoid linked life insurance policies, as these are tax-disadvantageous and, in the event of a claim, only provide a one-off payout.
Combine the insurance with a will, as term life insurance only covers the cash benefit, but not the rest of the estate (e.g. property).
The €20,000 trap: Why inheritance law disadvantages unmarried people
The biggest shock for many unmarried couples often comes only after the insurance payout: the tax office. While spouses are entitled to an inheritance tax allowance of €500,000, for unmarried partners this is only €20,000. Anything above that must be taxed. And here too the tax authorities take a harder line: unmarried partners fall into tax class III, which means that a tax rate of at least 30% is due from the very first euro above the allowance.
With an insurance sum of €300,000 for property protection, the calculation looks like this: if your partner dies and you are named as the beneficiary in a standard policy, the calculation is as follows:
Insurance sum: €300,000
Less allowance: €20,000
Taxable amount: €280,000
Tax rate (30%): €84,000
In this scenario, you would have to pay €84,000 to the tax office. Money that was actually intended to repay the loan or cover living expenses. According to the German Inheritance and Gift Tax Act (ErbStG), the payout of a life insurance policy is treated as an acquisition on death, provided the deceased was the policyholder. To prevent this, a carefully structured contract is necessary, one that legally classifies the acquisition process differently.
The Cross-Ownership Model: The Solution for Maximum Tax Exemption
The solution to the problem described above is the so-called cross-insurance arrangement. This involves taking out two separate contracts in which 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; instead, you insure your partner’s life for yourself.
The cross-insurance arrangement works like this:
Contract 1: Partner A is policyholder, premium payer and beneficiary. The insured person is Partner B.
Contract 2: Partner B is policyholder, premium payer and beneficiary. The insured person is Partner A.
If Partner B dies, Partner A receives the insurance sum from Contract 1. Since Partner A was themselves the contracting party for the insurance and paid the premiums, the tax office does not regard the payout as an inheritance, but as a benefit from their own contract. The sum therefore flows to Partner A completely tax-free, regardless of the amount. This route is the only legally secure method of transferring large sums without deductions.
Two separate contracts also offer flexibility in the event of a separation. Each partner can independently cancel their contract, make it premium-free, or theoretically even adjust the insured person (after a new health assessment), if this is supported by the insurer.
Linked lives vs. individual contracts: A comparison
Insurers often offer a so-called joint term life insurance policy. Under this arrangement, both partners are insured under a single contract. If one of them dies, the sum insured is paid out and the contract ends. This seemingly inexpensive solution is usually the worst choice for unmarried couples.
With a joint life insurance policy, the tax issue remains, as in the event of a claim it is often unclear to whom which share of the premium payments should be attributed. In addition, the sum is paid out only once. If both partners die at the same time (for example in an accident), the survivors (e.g. children) receive only the single sum insured. With two separate policies, by contrast, the double sum would be available, which is particularly essential for providing for children.
The right sum insured: How much cover is needed?
The optimal sum insured is crucial for protecting your dependants. A sum that is too low leaves the dependants with a financial shortfall, while a sum that is too high leads to unnecessarily high premiums. A common rule of thumb is often three to five times the gross annual income. For precise planning, include these factors:
Property loans: The remaining debt on the loan should be covered in full.
Children: You should allow around €50,000 to €100,000 extra per child to secure education and living expenses until they reach the age of majority.
Ongoing costs: Take into account fixed costs such as rent, insurance and lease payments that the surviving partner would have to cover alone.
Funeral costs: A dignified funeral in Germany costs on average between €8,000 and €13,000.
A concrete scenario: a couple with one child and a mortgage of €250,000 should aim for a sum of at least €400,000 per person. At nextsure, we enable you to flexibly adapt these sums to your stage of life. Thanks to guaranteed insurability options, you can often increase your cover without a new medical examination in the event of milestones such as the birth of a child or buying a home.
Common mistakes and legal pitfalls
In addition to tax, there are other points that unmarried people often overlook. A missing or incorrectly worded beneficiary designation is a critical mistake. In term life insurance, you decide who should receive the money in the event of death. A distinction is made here between revocable and irrevocable beneficiary designations.
With a revocable beneficiary designation, the policyholder can change the beneficiary at any time without asking them. With an irrevocable beneficiary designation, by contrast, the beneficiary already has a fixed entitlement that cannot be withdrawn without their consent. For partners, an irrevocable beneficiary designation offers greater security, but it can become a problem in the event of a messy separation.
In addition to the insurance policy, a will is necessary. Term life insurance only governs the payment of the insured sum. However, anyone who wants their partner to inherit the shared house or other assets must expressly set this out in a will. Without a will, intestate succession applies, and for unmarried people that means the partner gets nothing, while the deceased's parents or siblings become co-heirs. In the worst case, this can mean that the surviving partner has to sell the house in order to pay out the co-heirs.
Digital and secure: Why nextsure is your partner
At nextsure, we have digitised the term life insurance process without neglecting personal expertise. Within just a few minutes, you gain clarity about your needs and the costs.
We actively support you in structuring the cross-insurance arrangement. While many traditional portals only offer individual policies for the policyholder as standard, we guide you specifically through the tax-optimised option. For us, transparency also means making the health questions as simple and understandable as possible, so that you do not make any mistakes that could later jeopardise the cover.
More useful links
Haufe: Inheritance tax on life insurance policies offers information on this topic.
Literature
FAQ
Why is cross-collateralisation better than a joint contract?
A joint policy (joint lives) pays out only once and is problematic for tax purposes, as the payout is often treated as part of the estate. Two separate cross-assigned policies provide double protection (payment 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 obliged to report death benefit payments to the tax office. However, if you use the cross-over model, you can demonstrate to the tax office that you yourself were the policyholder and therefore no inheritance tax is due.
What happens to the insurance in the event of a separation?
As these are two separate contracts, each partner can cancel their own contract individually or make it paid-up. Alternatively, the policyholder can be changed, although this may have tax implications and would require a new review.
Is term life insurance enough to keep your partner in the house?
The insurance provides the necessary capital to repay loans. However, without an additional will, the partner has no statutory right of inheritance to the house itself. They would have to deal with the statutory succession (e.g. the deceased's parents).
How do pre-existing conditions affect the application?
Pre-existing conditions must be disclosed truthfully in the health questions. They can lead to risk surcharges or, in rare cases, to rejection. nextsure helps you answer the questions correctly so that, in the event of a claim, your cover is not jeopardised.
