Are life insurance payments subject to tax
Life insurance and tax: what you need to be aware of
The life insurance principle is still a popular instrument for old-age provision for many people, but above all for surviving dependents' provision. In Germany there are currently 87.1 million contracts concluded with life insurance companies, pension funds and pension funds. This was determined by the Association of the German Insurance Industry in 2019. From a tax point of view, the life insurance principle is extremely complex and many factors play a role. Because it not only depends on which life insurance you have chosen, but also when you have chosen this form of coverage. We will explain the taxation of life insurance policies using an example:
Georg, the new father of twins, wants to take out life insurance to protect his family in 2019. His older brother Heiko opted for such an insurance back in 2004. This means that different taxation rules apply to the brothers.
Georg is still looking for the right life insurance. Basically, he can choose between two forms - namely term life insurance or endowment life insurance.
Term life insurance
Term life insurance is pure death protection. This means: If the insured person dies during the term, the sum insured is paid out to the registered person. However, if the insured person experiences the end of the contract, the insurance expires. The insurer does not pay out any money.
Endowment life insurance
Endowment life insurance serves both death protection and old-age provision. That means: In the event of death, the family is covered. In contrast to term life insurance, the insured builds up a capital stock with his contributions. If the insured person experiences the end of the contract, the income is paid out - for example in the form of a monthly pension or a one-off payment.
Tax advantage of term life insurance
If Georg - or any other taxpayer - opts for term life insurance, the monthly contributions are deductible as pension expenses up to a maximum of 1,900 euros per year as a special expense.
By the way:
This also applies to contributions that flow into endowment life insurance - provided the insurance was taken out before January 1, 2005. Georg's brother Heiko, who already took out his insurance in 2004, can still use the special expenses deduction. If Georg opts for endowment life insurance in 2019, he is not entitled to this tax advantage.
Restriction: Since 2010, you have been able to state your contributions for basic health and long-term care insurance in an unlimited amount as a special edition. If your contributions are higher than 1,900 euros (employees) or 2,400 euros (civil servants), you can no longer claim your contributions for endowment insurance as a special expense.
In the event of death, inheritance tax may apply if the allowances are exceeded. You can avoid this if you and your partner take out cross-term life insurance. In other words: As the policyholder, you take out term life insurance for your partner's life and vice versa. In the event of death, the sum insured is paid directly to the partner, so there is no inheritance tax.
Taxation of endowment insurance depends on the year of conclusion
Endowment life insurance is paid out at the end of the term. How much tax you have to pay for your life insurance depends on when you signed the contract.
Contract concluded before 2005
Heiko took out his insurance back in 2004. If he meets the following requirements, he does not have to pay any taxes on the income:
- The contract runs for at least twelve years.
- The first contribution was paid into the life insurance policy by March 31, 2005 at the latest.
- As an insured person, he has paid contributions for at least five years.
- The maturity benefit, i.e. the amount paid out, is paid out in full at once.
If all conditions are met, the income from his life insurance remains tax-free. Otherwise, the entire income is subject to the final withholding tax.
Contract conclusion from 2005
Georg takes out his life insurance after January 1st, 2005. Therefore, he has to pay taxes in any case, the downstream taxation takes effect. After all, he only has to pay tax on 50 percent of the income
- the contract has run for at least twelve years,
- the sum insured is only paid out after the age of 60 (for new contracts from 2012 after the age of 62),
- the expiry benefit is paid out in full in one amount and
- the death protection covers at least 50 percent of the contribution amount. However, this last point only applies to contracts concluded after March 31, 2009.
If one of these criteria does not apply, Georg must have his income from life insurance fully taxed - in this case too, the withholding tax is then due.
For all contracts that were only concluded after March 31, 2009, there are two further points to be observed in terms of risk benefits - not to be confused with term life insurance:
- The risk performance of the contract must amount to at least 50 percent of the total contributions paid up to the end of the term.
- In the event of death, the agreed insurance benefit must be at least ten percent above the coverage capital or the current value of the policy after five years.
The 50 percent rule applies to contracts after March 31, 2009 only if these two requirements are also met.
Monthly payments must also be taxed
If you do not receive your income from endowment insurance in one lump sum, but rather monthly, you have to pay tax on the so-called income portion. Unfortunately, it is not possible to say in general how high the revenue share is. Because it depends on the age of the policyholder. As a rule, the earlier you take the monthly pension, the higher the share of income.
You do not have to worry about calculating the earnings share yourself, your insurer will do it for you. The income is then added to your taxable income and taxed at your personal tax rate. By the way, it doesn't matter when you signed your contract. In the case of a monthly payment, the income portion is generally taxed.
Cancel or sell life insurance
If you urgently need money during the contract period, you can cancel or sell your life insurance. It works like this:
- You can return the insurance policy to the insurer - this is the so-called buyback. The insurer then pays out a surrender value.
- You can sell the insurance policy to a third party - for example on the so-called secondary market.
By the way:
The issue of terminating or selling a life insurance policy is very complex from a tax perspective. The individual tax burden you have to pay depends on when the insurance was taken out, how long the term was and at what point in time you would like to claim the benefit. For the VLH consultants, it is part of their day-to-day business to find the most favorable solution for you. Find a consultant near you here: Consultant search.
This is an editorial text from the VLH editorial team. There is no advice on topics that are outside the tax advisory powers of an income tax aid association. Consulting services in specific individual cases can only be provided within the framework of the establishment of a membership and exclusively within the advisory authority according to § 4 No. 11 StBerG.
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