What types of life insurance are available? Your guide to suitable coverage and provision.
16 Apr 2025
7
Minutes
Katrin Straub
CEO 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 optimal solution for your needs. Discover how you can effectively protect yourself and your family.
The topic in brief and concise terms
There are different types of life insurance, primarily term life insurance for pure death protection and whole life insurance, which combines death protection with capital accumulation.
The unit-linked life insurance offers higher return opportunities through investment in funds, but also involves greater risks and is associated with higher costs.
The tax treatment of life insurance depends on the contract date and the form of payout; older contracts (before 2005) are often tax-advantaged.
Understanding the Fundamentals: An Overview of Basic Types of Life Insurance
Before we delve deeper into the details, it's important to know the basic categories when it comes to the types of life insurance available. Essentially, life insurances can be divided into two main groups: those that primarily cover the event of death, and those that additionally involve a savings process for survival benefits. Term life insurance belongs to the first group and pays out if the insured person passes away during the contract term.
Whole life insurance, on the other hand, combines death protection with a savings component that 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, highlighting the importance of this form of provision. These two basic forms serve as the foundation for further specialised products. The choice depends on whether pure survivor protection or also capital accumulation is desired.
Term life insurance: Targeted protection for your loved ones
The term life insurance is the primary answer to the question of what types of life insurance exist when the focus is solely on providing protection for dependents. It pays a predetermined sum if the insured person dies during the term of the contract. This form is particularly important for families or borrowers to secure, for example, a loan for a property with an average term of 20 to 25 years.
The premiums for term life insurance are comparatively low since no capital is saved for the event of survival. A payout is made solely in the event of death; if the insured person survives the end of the contract, no benefit is provided. Many banks require such coverage in property financing to minimize the risk of default in payment in the event of the main earner's death. Thus, term life insurance is purely a protection instrument and not a form of investment, making it a cost-effective solution for a specific need.
Whole life insurance: Saving and protection in one?
The whole life insurance, often referred to as traditional life insurance, combines death protection with a savings plan. It provides benefits both in the event of death during the term and upon reaching the end of the contract. The premiums are higher than for term life insurance because they include both a risk and a savings component, which can mean monthly costs of several hundred euros.
Historically, it was popular due to guaranteed interest rates and tax advantages, but its attractiveness has decreased due to falling guaranteed interest rates – currently 0.25 percent for new contracts since 2022 – and changed tax conditions. For contracts concluded from the first of January 2005, earnings are only half tax-free under certain conditions. Our expert tip: Carefully examine whether the return expectations of a whole life insurance policy meet your goals or if separating risk protection and capital investment could be more advantageous. The differences to pension insurance are also relevant. The terms can be up to 30 years.
Unit-linked life insurance: Opportunities and risks in the capital market
If you are wondering which life insurances offer higher yield opportunities, unit-linked life insurance is an option. Here, part of your contributions are invested in investment funds, such as equity or real estate funds. This allows for potentially higher returns than traditional term life insurance, but also carries the risk of losses if the funds perform poorly.
The payout in the event of survival depends on the value of the fund units; there is often no minimum guaranteed payout. The term usually is at least ten to 15 years. The following points should be considered with unit-linked policies:
The risk of losses is higher than with classic variants.
There is no guaranteed interest on the savings components.
The acquisition and management costs can be comparatively high.
The selection of funds is often limited, and changing funds is not always free of charge.
This form is more suitable for risk-tolerant investors who can handle potential price fluctuations. A thorough examination of the costs and fund selection is essential. For pure coverage, a term life insurance is often more sensible.
Special forms and additional components: Individual adjustments
In addition to the main types, there are other answers to the question of what life insurances are available. These include, for example, index policies, a special form of unit-linked life insurance where surpluses are invested in a stock index. Again, the return prospects are difficult to assess and are often reduced by high costs.
Furthermore, life insurances can often be expanded with additional modules. A common addition is the occupational disability additional insurance (BUZ). This secures the income in case the insured person can no longer work for health reasons. The contributions for this can be claimed as tax-deductible expenses, provided certain maximum amounts are not exceeded. An accidental death additional insurance, which promises a higher sum in case of death by accident, is often considered expensive and unnecessary by consumer advocates. The funeral insurance is another specific form that covers the costs of a funeral and can often be completed without a health check up to a certain insurance amount. This variety allows for adaptation to individual needs, but also requires careful selection.
Tax Aspects: What to Consider When Making a Payment
The tax treatment is an important factor in choosing and understanding the financial impact of life insurance policies. In the case of term life insurance, the payout in the event of death is income tax-free, but it may trigger inheritance tax if the exemptions are exceeded. For endowment policies, the taxation depends on the contract conclusion date.
Contracts concluded before the first of 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 returns (difference between payout and contributions paid) are taxable. Under certain conditions (term of at least twelve years, payout from the age of 62), only half of the income needs to be taxed at the personal income tax rate (half-income method). Otherwise, a flat-rate withholding tax of 25 percent (plus solidarity surcharge and, if applicable, church tax) applies. A life insurance tax calculator can provide an initial indication here. The duration of payout after a death is also a relevant aspect for dependents.
Practice Tips: Choosing the Right Life Insurance
The decision about which life insurance is the right one should be well-considered. Firstly, a precise needs analysis is crucial: Is it primarily about securing dependents or building capital for retirement provision? For young families or main earners with significant financial commitments, such as a mortgage over 250,000 Euros, a term life insurance policy is often the first choice.
Compare the offerings of various insurers closely, as premiums can vary significantly for the same performance. With capital and unit-linked life insurance, pay attention not just to the return opportunities, but also to the cost structure. High initial and administration costs, for instance, five percent of the contribution amount, can reduce the yield. Our expert tip: Seek independent advice to find the optimal solution for your situation. A payout in the event of death should be clearly regulated. Also consider what a life insurance policy is allowed to cost.
The following steps help in selecting:
Determine personal needs (protection, saving, both).
Set the desired insurance amount (e.g., three to five times the annual gross 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 offers from at least three different providers.
Answer health questions truthfully and completely to avoid jeopardizing the insurance coverage.
Carefully review the contract terms (the “small print”), especially exclusions and regulations on premium adjustments.
Careful planning and a detailed comparison are key to suitable coverage. We at nextsure are happy to assist you in finding the right solution and offer you an individual risk analysis.
More useful links
The consumer advice centre offers comprehensive information on life insurance as death protection and as an investment.
The Federal Ministry of Finance provides a definition of the term 'retirement provision'.
You can find information about the Riester pension on the German Pension Insurance page.
The Federal Ministry of Health explains the term 'long-term care provident funding'.
The German Central Bank publishes statistics on insurance companies.
FAQ
What life insurance makes sense for young families?
For young families, a term life insurance policy often makes sense to protect the main earner and avoid financial shortfalls in the event of death, for example, to secure a loan. The premiums are comparatively low.
Can I cancel a life insurance policy prematurely?
Yes, a life insurance policy can generally be cancelled early. However, with endowment life insurances, this often comes with financial disadvantages, as only the surrender value is paid out, which can be lower than the premiums paid. For term life insurance, the coverage lapses without payout.
What happens to my life insurance if I can no longer pay the premiums?
If you can no longer afford the contributions, there are several options. You can make the contract contribution-free (the insurance coverage remains reduced, or the savings process is halted), reduce the insurance sum, or cancel the contract. Contact your insurer for tailored solutions.
Are the surpluses in a life insurance guaranteed?
No, surpluses are generally not guaranteed. They depend on the economic success of the insurer and developments in the capital market. With traditional endowment life insurance, there is a guaranteed interest rate on the savings portion, which is currently very low for new contracts.
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 benefits, a medical examination or answering health questions is required. The answers affect the premium amount and whether the contract is concluded. Incorrect information can lead to the loss of insurance cover.
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