With capital or unit-linked life insurance, you save money for your pension. However, the state often wants something from the income.
If you want to live well in old age, you usually can’t avoid private provision. That’s why millions of Germans have life insurance. However, you are usually not allowed to keep the entire payment.
As with so many things in life, in most cases the state collects taxes on life insurance. This also applies if you cancel or sell the policy early. However, there are also life insurance policies whose income remains tax-free. The most important thing is the age of your contract.
That depends on when you took out the life insurance. If the contract started before 2005, the income is generally tax-free for you – regardless of whether you have the credit paid out, cancel the insurance or sell it (more on this in the next section).
However, for younger contracts: Yes, you have to pay taxes. This is what the Retirement Income Act requires. Exactly how taxes apply depends on what you do with your life insurance. An overview.
If you hold your life insurance until the end of the term, you will receive the so-called maturity benefit. This is the sum of your saved contributions minus costs, the credited surpluses from the insurance and the final bonus. You only have to pay tax on the pure income, i.e. the difference between the amount paid out and the contributions you paid in.
However, the state still grants you a discount on this capital income for life insurance: half of the income remains tax-free. According to Section 20 Paragraph 1 No. 6 of the Income Tax Act (EstG), you must meet the so-called 12/60 and 12/62 rules. That means:
- Payment will only be made after twelve years at the earliest
- and after the policyholder turns 60;
- for contracts concluded from 2012 after the age of 62.
For contracts from April 1, 2009, the death benefit must also amount to at least 50 percent of all contributions paid by the end of the contract term so that you only pay taxes on half of the income.
Although this is capital income, it is not subject to withholding tax, but rather to your personal income tax rate (more on this below).
Important: Your insurance company usually withholds the full amount of tax when it is paid out and pays it directly to the tax office. In order to use the so-called half-income regulation, you must take action yourself and file a tax return (more on this below).
If you cancel your life insurance, you will receive the so-called surrender value. The same applies here: If you meet the 12/60 or 12/62 rule (see above), you only have to pay tax on half of the income. The return is the surrender value minus paid contributions. Read here how much your life insurance is worth.
However, if you cancel too early, you will have to pay withholding tax on the full capital gains. However, the savings allowance can ensure that you only have to pay tax on the amount by which the profit exceeds your tax allowance.
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If you sell your life insurance, you will receive a purchase price from a specialized provider. This amount, minus the contributions you have paid in, equals your profit.
You have to pay withholding tax on this, but your insurance company takes care of this for you. You can also have the savings allowance credited to your tax return if you fill out the KAP appendix. You can read more about selling life insurance here.
If you still have an old life insurance policy, i.e. started your contract before January 1, 2005, the income is tax-free – if you meet these criteria:
- The contract must have existed for at least twelve years.
- You must have paid contributions regularly for at least five years.
- The agreed death benefit must be at least 60 percent of the contributions paid.
Good to know: You can see exactly when you concluded your contract on your insurance certificate. What matters is the date that is written there.
You must pay tax on income from life insurance policies that you took out from 2005 onwards. How high the tax is depends on what type of profit it is.
If you have the maturity benefit paid out, you will have to pay income tax on the difference between this amount and your contributions. The percentage that applies to you depends on your income. If you meet the 12/60 or 12/62 rules (see above), you only pay income tax on half of the income.
