What types of life insurance are there? Your guide to the right protection and provision
16.04.25
8
Minutes
Katrin Straub
Managing Director at nextsure
Choosing the right life insurance can seem complex, but it is a crucial step for your financial security and that of your loved ones. This article explains the types of life insurance available and helps you find the ideal solution for your needs. Discover how you can protect yourself and your family effectively.
The topic in brief and concise terms
There are various types of life insurance, primarily term life insurance for pure death cover and endowment life insurance, which combines death cover with capital accumulation.
The unit-linked life insurance policy offers higher potential returns through investment in funds, but also carries greater risks and is associated with higher costs.
The tax treatment of life insurance policies depends on the contract date and the payout method; older policies (before 2005) are often tax-advantaged.
Understanding the basics: An overview of the main types of life insurance
Before delving deeper into the details, it is important to know the basic categories when it comes to the question of which life insurance policies are available. In principle, life insurance policies can be divided into two main groups: those that primarily provide cover in the event of death, and those that additionally include a savings component for the event of survival. Term life insurance belongs to the first group and pays out if the insured person dies during the term of the policy.
By contrast, endowment life insurance combines death cover with a savings element, which is paid out at the end of the term or in the event of death. There are over 81 million life insurance contracts in Germany, underlining the importance of this form of provision. These two basic forms provide the basis for further specialised products. The choice depends on whether pure protection for dependants or also capital accumulation is desired.
Term life insurance: Targeted protection for your loved ones
The term life insurance policy is the first answer to the question of which life insurance policies are available when the focus is purely on providing for survivors. It pays out an agreed sum if the insured person dies during the policy term. This form is particularly important for families or borrowers, for example to secure a loan for a property with an average term of 20 to 25 years.
Premiums for term life insurance are comparatively low, as no capital is accumulated for a payout on survival. A payout is made exclusively in the event of death; if the insured person survives to the end of the policy, there is no benefit. Many banks require this kind of cover for property financing in order to minimise the risk of default if the main earner dies. Term life insurance is therefore purely a protection product and not a form of investment. This makes it a cost-effective solution for a specific need.
Endowment life insurance: saving and protection in one?
The endowment life insurance policy, often referred to as a traditional life insurance policy, combines death cover with a savings plan. It pays out both on death during the term and if the contract matures. Premiums are higher here than for term life insurance, as they include both a risk and a savings component, which can mean monthly costs of several hundred euros.
Historically, it was popular because of guaranteed interest rates and tax advantages, but its appeal has declined due to falling guaranteed rates – currently 0.25 per cent for new contracts since 2022 – and changed tax conditions. For contracts taken out from 1 January 2005 onwards, returns are only half tax-free under certain conditions. Our expert tip: check carefully whether the expected return from an endowment life insurance policy matches your goals, or whether separating risk cover and capital investment would be more advantageous. The differences compared with annuity insurance are also relevant. The terms can be up to 30 years.
Unit-linked life insurance: opportunities and risks in the capital markets
If you are wondering which life insurance policies offer higher potential returns, unit-linked life insurance is an option. Here, part of your premiums is invested in investment funds, such as equity or property funds. This can potentially generate higher returns than traditional endowment life insurance, but it also carries the risk of losses if the funds perform poorly.
The payout on survival depends on the value of the fund units; there is often no guaranteed minimum payout. The term is usually at least ten to 15 years. The following points should be noted for unit-linked policies:
The risk of losses is higher than with traditional policies.
There is no guaranteed interest rate on the savings portion.
Initial and administrative costs can be comparatively high.
The choice of funds is often limited, and switching funds is not always possible free of charge.
This type is more suitable for risk-tolerant investors who can deal with possible price fluctuations. A careful review of the costs and fund selection is essential. For pure protection, term life insurance is often more suitable.
Special forms and additional modules: Individual customisations
Besides the main types, there are other answers to the question of which life insurance policies are available. These include, for example, index policies, a special form of unit-linked life insurance in which surpluses are invested in a stock index. Here too, the return prospects are difficult to assess and are often reduced by high costs.
Moreover, life insurance policies can often be extended with additional components. A common addition is supplementary disability insurance (BUZ). This secures income if the insured person can no longer work for health reasons. The premiums for this can be claimed for tax purposes as retirement provision expenses, provided certain upper limits are not exceeded. An accidental death rider, which promises a higher sum in the event of death by accident, is often classified by consumer advocates as expensive and unnecessary. The funeral insurance is another special form that covers the costs of a funeral and can often be taken out without a medical examination up to a certain sum insured. This variety allows it to be tailored to individual needs, but also requires careful selection.
Tax aspects: What to bear in mind when making the payment
Tax treatment is an important factor when choosing between and considering which life insurance policies are available and how they affect you financially. For term life insurance, the payout on death is exempt from income tax, but may trigger inheritance tax if allowances are exceeded. For endowment life insurance policies, taxation depends on the contract start date.
Contracts concluded before 1 January 2005 are often tax-free if certain conditions such as a minimum term of twelve years and a contribution payment period of at least five years are met. For newer contracts (concluded from 2005 onwards), the gains (the difference between the payout and the contributions paid in) are taxable. Under certain conditions (term of at least twelve years, payout from the age of 62), only half of the gains must be taxed at the personal income tax rate (half-income method). Otherwise, flat-rate withholding tax of 25 per cent (plus solidarity surcharge and, where applicable, church tax) applies. A life insurance tax calculator can provide an initial indication here. The payout period after a death is also a relevant aspect for surviving dependants.
The decision as to which life insurance is the right one should be made carefully. First, a precise needs analysis is crucial: Is the primary aim to provide for dependants, or to build up capital for retirement provision? For young families or main earners with high financial obligations, such as a mortgage loan of over 250,000 euros, term life insurance is often the first choice.
Compare the offers from different insurers carefully, because premiums can vary significantly for the same level of cover. When looking at whole-of-life and unit-linked life insurance, pay attention not only to the return potential, but also to the cost structure. High initial and administration costs of, for example, five per cent of the total contributions can reduce returns. Our expert tip: seek independent advice to find the best solution for your situation. A lump-sum payment in the event of death should be clearly regulated. Also consider what life insurance should cost.
The following steps help with the selection:
Determine personal needs (protection, saving, both).
Set the desired sum insured (e.g. three to five times gross annual income for term life insurance).
Define the contract term (e.g. until the end of the loan term or until the children are financially independent).
Obtain and compare quotes from at least three different providers.
Answer health questions truthfully and completely so as not to jeopardise insurance cover.
Carefully review the contract terms (the “small print”), especially exclusions and provisions regarding premium adjustments.
Careful planning and a detailed comparison are the key to suitable cover. At nextsure, we are happy to help you find the right solution for you and offer a personalised risk analysis.
More useful links
The Consumer Advice Centre provides comprehensive information on life insurance as protection in the event of death and as an investment.
The Federal Ministry of Finance provides a definition of the term 'retirement provision'.
Information on Riester pensions can be found on the German Pension Insurance website.
The Federal Ministry of Health explains the term 'long-term care prevention funding'.
The Bundesbank publishes statistics on insurance companies.
FAQ
Which life insurance policy is suitable for young families?
For young families, term life insurance is often advisable to protect the main earner and avoid financial shortfalls in the event of death, for example to secure a loan. Premiums are comparatively low.
Can I cancel a life insurance policy early?
Yes, a life insurance policy can generally be cancelled early. However, with whole life insurance policies this is often associated with financial disadvantages, as only the surrender value is paid out, which may be lower than the premiums paid in. With term life insurance, the cover lapses without any payout.
What happens to my life insurance if I can no longer pay the premiums?
If you can no longer pay the premiums, there are various options. You can make the contract paid-up (the insurance cover remains in place at a reduced level or the savings process is stopped), reduce the sum insured or cancel the policy. Contact your insurer for tailored solutions.
Are the surpluses in a life insurance policy guaranteed?
No, surpluses are generally not guaranteed. They depend on the insurer's financial performance and developments on the capital market. With traditional endowment life insurance policies, there is a guaranteed technical interest rate on the savings component, which is currently very low for new policies.
Do I need a medical examination to take out a life insurance policy?
Yes, for most life insurance policies, especially term life insurance and whole life insurance with death benefit cover, a medical examination or the answering of health questions is required. The answers influence the premium amount and whether the contract is concluded. False statements can lead to loss of insurance cover.
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