Protection of the family in case of death

Term Life Insurance in Germany

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First things first

Term life insurance pays a fixed sum to your survivors in the event of your death. It serves as financial protection, especially if the main family earner dies.

This type of protection is particularly important if the family still has high financial obligations, such as a construction or real estate loan.

Term life insurance is not a particularly expensive insurance. The insurance premium depends on many factors: sum insured, age, health, smoker, non-smoker, etc.

There are ways under German tax law to make sure that the pay-out for the life insurance is tax-free.

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Term Life Insurance

Patrick Ott
Patrick Oliver Ott
Expert for insurance and finance
8. March 2022
Risk coverage for your death

What is a term life insurance and who needs it?

Term life insurance protects your loved ones from financial catastrophe. If your family depends on your income, you might want to consider this type of insurance to cover against the financial consequences of your passing.

According to statistics, 15% of people in Germany die before the age of 65. Accidents or serious illnesses are the cause. Without adequate coverage, families are left destitute in the worst case.

The principle of term life insurance is very simple, although dramatic. If the insured person dies, the agreed sum insured is paid out. It is important to choose the right term and appropriate sum insured.

Term life insurance is particularly advisable for these situations

1. Family creation: at the latest when there are children on the way and financial obligations increase, you should think about the financial consequences of a death. Are you both employed or is there only one source of income? Can the income of one spouse be waived? Or is the other spouse's income sufficient to provide for the family?

2. Purchase of a property: Rarely is a property paid for in cash. Most often, a loan is taken out for it. The repayment of the loan is a financial obligation linked to the income of the main earner of the family. Here, term life insurance serves to guarantee repayment of the loan so that the property does not have to be abandoned.

Even if you are unmarried and without children, it makes sense to cover each other for this situation.

What sum insured and term makes sense?

This can be quite a personal decision, depending on what your family needs and how much money is already available. It´s good to have at least 12 months expenditure covered, more if you have a dependent spouse caring for children, more again for very young children. A rule of the thumb says that the main earner of income should be covered at least for 3 times his or her yearly income.

If you know that your family without you needs about € 1,500 monthly to live and for all fixed costs and you want to secure them for the next 15 years, then you can also calculate the amount quite easily:

€ 1,500 x 12 months x 15 years = € 270,000 sum insured

In case of a loan, the payout should also allow the family to pay off your mortgage. The insurance amount should therefore be at least equal to the amount of the remaining debt of the loan. The family do not need to worry about losing their home.

Falling or constant sum insure?

With a constant sum insured, the insured amount remains the same over the entire term. If you have chosen € 250,000 at the beginning, this is the sum that is fixed for the entire term of the term life insurance. It does not matter whether the insured person dies on the first or last day of the insured period.

In our view, this variant is the more sensible one for most situations. No matter whether it is as a hedge for the family or when buying a property.

It is true that over time the hedging risk becomes smaller due to saved assets or the repayment of the loan, and you could switch to a lower sum insured. However, the purchasing power of the sum insured is simultaneously lower due to inflation. Therefore, infaltion and hedging risk balance each other out.

Nevertheless, there is an option to choose a decreasing sum insured in term life insurance. This form is chosen, if at all, for the coverage of a loan. Every year, the residual debt of the loan decreases and the sum insured can be reduced accordingly.

Our advice: It is better to take a higher sum insured at the beginning. You can reduce this at any time. An increase in the sum insured is often linked to renewed health questions and can therefore be more expensive or even impossible.

Tax optimisation of a term life insurance

Tax optimisation of a term life insurance
There are ways under German tax law to make sure that the pay-out for the life insurance is tax-free. Ideally, one partner sets up the contract to insure the other partner´s life, so that the payout can be made directly to the survivor without being subject to inheritance tax.

This can be especially important for unmarried couples since the inheritance tax allowance for unmarried couples is only € 20,000.
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Term life insurance: What options are there and which one suits me?

You have the choice between different contract models when deciding on term life insurance as a couple. There is the 'linked insurance', the 'cross insurance' as well as 'individual contracts'.
  1. Individual contracts: In this case, each person takes out insurance for his or her own death. You are therefore the policyholder and insured person yourself. You can appoint a beneficiary in the contract, to whom the insured sum will be paid out when you die. 
    Advantage: With this variant, you are very flexible. You can change the beneficiary at any time. For example, in the event of a separation, you can appoint your child instead of your ex-partner.
  2. Linked insurance: in this case, two persons (spouses) take out the contract together. There is only one sum insured. In case of death of one partner, the other partner receives the insured sum. If both partners die at the same time (e.g. accident), the heirs (children) receive the amount.
    Advantage: Often cheaper than individual contracts, as the sum insured is only covered once.
    Disadvantage: In the event of separation, the insurance cannot simply be converted into individual contracts. Likewise, the contract expires upon the death of a partner. The surviving partner receives the sum insured, but must then take out a new insurance policy. Depending on age and health, this can be difficult.
  3. Cross-insurance: For unmarried couples, cross-insurance makes sense in order to save taxes. While married couples have a tax allowance of € 500,000, unmarried couples pay inheritance tax on an amount of € 20,000. In this model, you take out insurance on the death of your partner. If the partner dies, you receive the sum insured from your own policy. No tax is payable.
    Disadvantage: In case of separation, this model is a strange constellation and should be terminated or changed.
Term life insurance: What options are there and which one suits me?

What does term life insurance cost?

The amount of the term life insurance premium depends on various factors. The two most important aspects are the sum insured and the term of the contract. However, there are also other so-called risk factors, such as, for example:

  • Age
  • Health
  • Profession
  • Weight
  • Leisure activities (e.g. skydiving)
  • Smoking

For an insurance amount of 250,000 and a term of 25 years, the insurance premium can range from € 120 to € 350 per year. The risk factors, but also the company, make the difference.

It is important to answer the insurance company's questions truthfully when applying. This is part of their obligations. If you give false information, in the worst case, the insured sum may not be paid out in the event of death.

Example: You state in the contract that you are a non-smoker. Later, the cause of death is determined to be lung cancer due to heavy smoking. In this case, the insurance company will certainly refuse to pay.

Additional benefits of a term life insurance

There are also special benefits that can make a difference. Therefore, when concluding a contract, it is important not only to have an eye on the sum insured and the term, but also on the additional benefits. The cheapest tariffs usually offer no or few additional benefits.

Subsequent insurance guarantee

It is optimal to take out term life insurance as long as you are healthy. Often, one is only at the beginning of life and there are no children on the way yet. That is why the sum insured is still relatively low. With a subsequent insurance guarantee, you have the option of increasing the sum insured when certain life situations arise. Without a new health check.

Depending on the company and the tariff, an adjustment of the sum insured is only offered once or it can happen several times in the course of a lifetime. For example, with the birth of each child or the purchase of a home. 

Dynamics in the policy

A dynamic ensures that the sum insured increases every year or in defined periods. This compensates for inflation and maintains the purchasing power of the term life insurance. Whether this is necessary or not is something everyone must decide for themselves.  

Renewal option for term life insurance

The insurance ends at a defined point in time. With a renewal option, you can extend the contract term without a new health check. This can be useful if life circumstances change and cover is needed for a longer period than originally planned.

The alternative is to choose a longer contract term from the outset. If the insurance is no longer needed at a certain point in time, it can be cancelled.

Early death benefit

In the event of a serious, fatal illness, part of the sum insured can be paid out before your death. This can be useful if, for example, you are in need of severe care and the children need the money. However, the purpose of term life insurance should remain to provide for your survivors after your death.

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