How high is the payout?
Endowment life insurance policies are often taken out for many years, in Germany usually for almost 30 years. But do you know what will be in 30 years? Many people obviously don't know, because they opt out beforehand. On average, endowment life insurance policies are not even held for the twelve years that would be necessary for tax benefits on the returns, but only eight years. But those who drop out beforehand do not achieve the sums promised by the representative – on the contrary, they usually paid in more than they got out.
But even for those who stick it out, the returns on life insurance policies are usually – not always – below average. With the in former times obtained net yield between 5 and 6 per cent it is already longer past. And the tax advantage is also not as high as it used to be: For contracts concluded before 2005, it is still the case that the income from life insurance policies is tax-free when paid out, provided the contract runs for twelve years or longer.
For contracts taken out after 1. January 2005 were concluded, the entire fictitious profit participation with the personal tax rate must be taxed. Exception: If the contract is held for at least twelve years and the saver is at least 60 years old when it is terminated, only half of the notional profit participation must be taxed (the so-called half-income procedure). The profit sharing is fictitious because the state does not calculate it exactly. The profit share is exactly the amount that exceeds the paid-in contributions.
Mr. Muller is 62 years old and after twelve years receives from his life insurance policy before taxes 50000 Euro. He has paid in 32000 euros over the years. This makes a fictitious profit sharing of 18000 euros. The tax authorities are now demanding income tax on half of this amount, i.e. 9,000 euros. At a personal tax rate of 33 percent, Mr. Muller must pay 3,000 euros in taxes. So he still has 47000 euros left.
The payments would be tax deductible if the special expenses are not – as is almost always the case – already used up by the social security contributions.
Final withholding tax from 2009
Tax-free investments are slowly coming to an end: from 1. January 2009, a uniform final withholding tax of 25 percent plus solidarity surcharge plus any church tax applies to interest, dividends and price gains from investments in securities, provided you exceed the interest allowances. The interest allowances have been lower since 1. January 2007 at 801 euros (single) and 1,602 euros (married) per year, respectively. For all equity, bond and money market funds that are still available until 31. However, the old rules still apply to portfolios purchased on or after December 2008: hold for one year and then collect tax-free capital gains!
The following options are available for endowment life insurance policies: From 2009, the final withholding tax will apply to all income from policies that have been in force for less than twelve years or where the saver has not yet reached the age of 60 when the policy is paid out. has reached the age of 65.
Back to the example above. Let's take the same figures, but let Mr. Muller be only 58 years old. Then here would be 25 percent final withholding tax of 18000 euros, so 4500 euros. And thus less than under the old system: here the personal tax rate of 33 percent would have been applicable, and thus 6000 euros in taxes, since the entire fictitious profit participation would have to be taxed.
For the others, the previous half-income method remains in place, where half the gain is taxed at the personal tax rate. There is no change for contracts signed before 2005. They are – if they have existed for twelve years or more – neither affected by income tax nor by the final withholding tax.
Life Insurance and Inflation
A story from the Gothaer life insurance trove: on 3. November 1927, a notary from Salzwedel took out a life insurance policy for 30000 Reichsmark. Insurance became due 18 years later, on 3. November 1945. It was also paid out; unfortunately, however, shortly after the end of the war, the money was no longer worth the paper it was printed on. A blatant case – and fortunately no longer conceivable in this way today. But it sheds light on a phenomenon that hardly gets any attention in life insurance today: inflation.
Representatives often bring up the argument that the surplus participation would still double the sum insured. This may well be true after a term of 25 or 30 years. However, inflation has gnawed away at purchasing power during this period. The bottom line is that in the past, many customers got out just as much as the figure in their policy was worth at the time, based on purchasing power. This means that no real appreciation had taken place for these clients – unlike many investors who had invested in real assets such as stocks or real estate! In return, however, the risk of losing money was much lower.
If you want to take out a normal life insurance policy today, the following applies: short terms are the best terms. For those who believe they can hold out, and who still have room in their tax return for insurance premiums under special expenses, endowment insurance may even be worthwhile. However, the fiscal minimum duration of twelve years should also be the maximum duration.
For singles actually superfluous: the death protection
If survivorship protection is rather too meager for many endowment policies purchased, it may even be redundant for other customers. This is because endowment insurance policies are often taken out even though there are no surviving dependents to provide for – by singles, namely. As a single person, you should therefore carefully consider how likely you are to have a family to support in the next few years. If it is low, then you give away part of the paid-in capital.
Unit-linked life insurance
Unlike normal endowment insurance, unit-linked life insurance (sometimes called unit-linked policies) separates the savings portion from the expense portion of the premium – an advantage for you as an insured person! Indeed, the savings portion moves into a special asset, the fund precisely. These special assets are untouchable for the company, so they can no longer be used to offset additional costs or the like.
Normally, you can choose between equity, bond and real estate funds, depending on the company's offer. However, with some insurers the fund is fixed. However, like a normal fund saver, you are tied to the performance of the fund, and thus to the ability of the fund management to use your money as profitably as possible.
You may find yourself in a quandary: If you want to get out of a unit-linked life insurance policy early because the underlying fund is performing worse than you had hoped, you should only do so if you are in good health. This is because a new health check is also due when a new policy is taken out!
This makes another difference to a normal life insurance clear: The security of achieving certain returns is significantly lower, especially in the case of life insurance policies based on shares or real estate funds! In this respect, a fund policy is also only conditionally suitable for old-age provision, as in a bad case you can receive significantly less than expected. But you can spread the risk by dividing the savings rate among several funds. However, these should not be exclusively equity funds, because if the stock market is in the basement at the end of the term, that doesn't leave your fund policy in a much better position either.
123Insurance Advisor Tip
Before you sign a unit-linked life insurance policy, consider the following alternative: Take out death cover for the same amount with a term life insurance policy and pay the saved premiums into a fund savings contract, for example with a bank or a reputable fund company.
Endowment life insurance and Hartz IV
An endowment life insurance is not Hartz IV safe, as is often believed. For Hartz IV recipients, however, there is basically an allowance for assets, which includes a life insurance policy. This allowance is composed of a basic allowance and a retirement allowance.
Basic allowance The basic allowance is 200 euros per year of life – but at least 4100 euros, but no more than 13,000 euros. More generous are the limits for the unemployed born in 1947 or earlier: The basic allowance for these persons is 520 euros per year, up to a maximum of 33,800 euros. Retirement allowance An additional retirement allowance of 200 euros per year is credited if the policy cannot be taken out before you reach retirement age.
On the other hand, assets should not be squandered either. If the surrender value would be more than 10 percent below the premiums already paid, the contract need not be sold.
Use life insurance to finance your own home?
Quite a few home financings in Germany are designed with endowment life insurance policies. At first glance, this seems like a good idea: Instead of paying off the mortgage itself, the life insurance company pays off the mortgage loan in one fell swoop at the end of the term. But this idea has often backfired in the past: After the crash of 2001/2002, the promised returns were not delivered, but the loan still became due in full.
The risk of interest rate increases after expiration of the fixed-interest period also affects the full loan amount, since nothing has been repaid by then. Many a homeowner has had to pay high five-digit sums – or sell the house (at a loss) – if he could. In this respect: Hands off this financial construction!