Term life insurance: what it can do and what it costs


Lerato Khumalo

There are many types of insurance. But only some are really important. One of them is term life insurance – at least under certain circumstances.

Term life insurance is a form of protection for survivors in the event of one’s own death, explains Holger Rohde from Stiftung Warentest. If the insured person dies, the term life insurance pays out the sum agreed in advance. People should have such a policy, especially if there is financial dependency, advises Rohde. “This way, if a borrower dies, the loan can be paid off and the house or apartment does not have to be sold.”

If, however, death does not occur during the term of the insurance, there is no money – in contrast to capital life insurance. With this policy, in addition to covering the event of death, capital is accumulated and interest is paid on it. “It’s basically a combination of saving and insurance,” says Rohde. If the insured person does not die, the accumulated capital is paid out at the agreed time.

Such a capital-forming life insurance policy has been good in the past, “but now we recommend separating the insurance and savings product and building up capital with an ETF savings plan, for example,” says Rohde.

There are various ways to protect yourself with term life insurance: One form is linked term life insurance: Here, two people are insured in a single contract and listed as beneficiaries – for example, life or business partners.

If one of the two dies, the insurance sum is paid out to the surviving partner. After that, the contract ends automatically. “This form is not necessarily cheaper than two separate contracts and is therefore often the worse solution,” says Claudia Frenz from the Association of Insured Persons. But: With this variant, at least no inheritance tax is payable.

With so-called cross-insurance, each of the two partners takes out their own term life insurance contract. In this case, both partners insure the other’s life in their contract. If one partner dies, the surviving partner receives the insurance benefit from their own contract. This also means that no inheritance tax is payable.

And then there is the possibility that couples take out two independent contracts. In these, policyholders insure their own lives and enter the desired recipient of benefits as the beneficiary. In the event of death, the beneficiary then receives the agreed sum from the other’s insurance contract.

The disadvantage: With this arrangement, inheritance tax is due if the allowance is exceeded because the insurance sum comes from someone else’s contract, not your own. Good to know: The amount is not subject to income tax in any of the three cases.

According to Claudia Frenz, the cost of the policy depends primarily on the agreed death benefit amount. However, the term of the insurance, the age at which the policy is taken out, the health of the insured person at the time of application and their occupation also play a role.

According to “Finanztip”, policies with an insured sum of 200,000 euros cost between 100 and 300 euros per year. The rule is: “The longer the contract period, the higher the premium, because the risk of death increases with age,” says Frenz. Risky hobbies and nicotine consumption can also drive up the price.

There are also differences in the small print of the individual policies. According to Frenz, some policies allow the insured sum to be increased retrospectively using the so-called additional insurance guarantee. Sometimes it is also possible to extend the term without a new health check or to switch from a smoker’s to a non-smoker’s plan. All of this can be useful if life circumstances change. Some insurance companies even promise an early death benefit if the policyholder becomes terminally ill.

It is definitely not advisable to answer the health questions incorrectly when taking out insurance, for example in order to save on the insurance premium. If an insured event occurs, the insurer can otherwise refuse to pay out the benefit or at least reduce it. If you are not sure what is in your own medical records, you should definitely ask the relevant doctors, recommends “Finanztip”.

When it comes to the term, policyholders should make sure that they choose a policy that is long enough for their partner to be dependent on the potentially lost income, advise the experts at “Finanztip”. That is, until the house is paid off or the children have finished their education. If in doubt, it is better to play it safe and stick with it for a few years. During the term, you can cancel the insurance or make it premium-free.

Important: If the insured person’s death actually occurs during the insurance period, the beneficiaries should inform the insurance company immediately. Otherwise, insurers can also reduce benefits in this case.