Unit-linked life insurance in Germany

Unit-linked life insurance in Germany
Patrick Ott
Martina Martinez
Expert for insurance and finance
18. June 2024

Unit-linked life insurance consists of term life insurance and a fund investment. What does that mean? The purpose of term life insurance is to protect the life of the policyholder: In the event of death, termination of the contract or at the contractually agreed end of the term, a certain sum or annuity is paid out to the policyholder or their dependents, depending on the insurance variant.

With traditional life insurance, on the other hand, your money is invested in fixed-interest products that are safe but only yield low returns. The profit is very often too small to protect your money from the increase in inflation over the years.

Unit-linked life insurance gets its name because the money you pay in for life insurance is invested in funds. The return you can achieve with the insurance depends on the stock markets and the price of the funds. This creates both the possibility of higher profits and a financial risk.

How does unit-linked life insurance work?

Unit-linked life insurance works in the same way as traditional life insurance. However, the tariff is linked to a fund investment. The money you pay in is therefore invested in funds. What this means for you: If you take out unit-linked life insurance, you should find out in advance about the fund selection offered to you depending on the insurer.

The following types of fund are usually offered as part of the insurance:

  • Equity funds
  • bond funds
  • Real estate funds
  • mixed funds

Whether you opt for high-risk or safer funds depends on you. It is advisable to seek detailed advice in this regard.
Once you have agreed the investment funds with the provider, the savings phase begins. This means that you pay an insurance premium on a monthly or annual basis. The amount you pay is variable: it depends on the tariff, the contractual agreements and your state of health when you take out the policy. You can also increase insurance benefits by making additional payments during the savings phase.

When choosing a plan, it is also important to consider whether and how your plan allows you to switch between funds over time. Look for a tariff with a switching option. After all, the potential returns of your tariff depend on the funds in which you have invested your money.

In the event of a switch, there are two options:

  • The entire balance that you have paid into the insurance is transferred from the old to the new funds
  • Only new deposits are invested in the newly selected funds. What you have already paid in remains in the old funds

The best way to find out which option is best for your capital is to talk to an advisor. In any case, it is important for a unit-linked life insurance policy that you obtain detailed and continuous information about which funds your capital is invested in and what they are worth. Only then it is worth taking out the policy, as the value of your life insurance corresponds to the value of the investment funds.

Our advice: Most unit-linked life insurance policies lack a guaranteed interest rate, so market conditions determine your policy's value. Some tariffs offer maximum level guarantees, paying the highest market value reached. You can also opt for guaranteed funds, though this incurs higher costs.

The payout

If the insured event occurs or the agreed insurance period has expired, the sum insured is paid out. How this actually takes place varies depending on the tariff and contract. As a rule, however, the following two options are available:

  • One-off payment: At the end of the contract or in the event of death, the agreed sum is paid out in full by the insurance company to the insured person or their family
  • Annuity: In the event of an insured event, the sum saved is not paid out all at once, but in the form of a monthly annuity for an agreed period. You as the insured person or your family members receive the cash pension

As the unit-linked variant of life insurance is linked to the market value of the selected funds, it is important to keep an eye on this and the performance of the stock markets if you have opted for this type of retirement provision. The reason for this is that if the markets are not in a good phase at the end of the contract, you can use the extension option (if your plan provides for this). This allows you to extend the term of your contract and optimize your return.

Termination, surrender value, lending

If you are no longer satisfied with your unit-linked life insurance or need to access your invested capital, you can cancel the policy. However, you should carefully consider whether this option really makes sense for you and only use it if there is no other option. Early termination usually results in a financial loss for you. Due to the insurance costs, you will often receive less than the premiums you have paid for your policy when you cancel.

The money you get back on termination is the so-called surrender value of your insurance. This is related to the market value of the investment funds in which your money is invested. Early termination is therefore not advisable in the first few years after taking out insurance: In this case, the costs will certainly exceed the gains.

If you find yourself in financial difficulties, you can lend on your unit-linked life insurance. Some insurance companies as well as life insurance buyers offer mortgage lending. When you take out a loan against your life insurance policy, it is pledged as collateral for a loan. However, the costs of the loan are usually higher than the return on the insurance. For this reason, mortgaging is usually cost-ineffective.

Tax aspects

Tax aspects are an important criterion when choosing your retirement provision. What about unit-linked life insurance? Are the premiums paid in tax-deductible? Are the insurance benefits taxable after the payment-in phase?

As far as the tax deductibility of your insurance premiums is concerned, you must note the following. If your insurance contract was concluded before January 1, 2005, the monthly or annual insurance premiums are considered pension expenses. They are therefore tax-deductible. For contracts concluded after January 1, 2005, the tax advantage does not apply.

During the payout phase, you must bear in mind that profits from capital investments such as funds are generally taxable. However, even in this case, contracts that were concluded before January 1, 2005 enjoy some advantages. In this case, there is no tax liability if three conditions are met:

  1. The contract must have been in place for at least twelve years
  2. The insurance premiums have been paid in regularly for at least five years
  3. The death benefit amounts to at least 60 percent of the capital paid in

Unit-linked life insurance: advantages and disadvantages

If you are thinking about using unit-linked life insurance to secure your retirement provision and protect your loved ones from financial risks, you should be aware of the advantages and disadvantages of unit-linked life insurance.


  • Higher returns than classic life insurance
  • Combination of retirement provision and investment
  • Choice of investment funds


  • higher risk and high costs
  • You have to carefully consider the fluctuations in the stock markets
  • The fund selection has leeway, but is limited by the provider

When and for whom is unit-linked life insurance worthwhile?

Unit-linked life insurance is more worthwhile than traditional life insurance. However, this assumes that you can bear the costs. If you can no longer do so, you have the option of terminating the policy early. However, this entails losses: your invested capital is usually lost in the event of premature termination.

Unit-linked life insurance also makes sense because it combines retirement provision with fund investments and therefore generates more profits than traditional life insurance. However, this requires you to be familiar with the stock market and stay informed about the performance of your funds.

For these reasons, unit-linked life insurance is only worthwhile for those who want to invest money for the long term and are already familiar with the topic of investments. If this does not apply to you, unit-linked life insurance is not advisable. In this case, alternative forms of old-age provision are recommended.

Additional benefits of a term life insurance

Unit-linked life insurance is a pension product that consists of a savings investment in investment funds. At the end of the contract or in the event of death, the insurance benefit is paid out and the sum insured is paid out either as a lump sum or as an annuity.

Unlike traditional life insurance, unit-linked life insurance offers the possibility of higher returns and financial benefits. However, you will only benefit from this if you keep abreast of developments on the stock markets in order to monitor the status of your policy and your invested capital. This is necessary because otherwise there is a risk of financial losses.

Unit-linked life insurance is therefore only recommended for those who are prepared to take a certain amount of risk.

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