Benefit minus premiums, and when only half of it counts

Mr Brandt is 61 and has his German endowment policy paid out in 2026: 60,000 €, against premiums of 45,000 €. He signed the contract in 2012, so the twelve years are met, and he expects half of the 15,000 € gap to be taxed. The insurer sees it differently: for contracts signed from 2012 the law requires age 62, and he is exactly one year short.

Which contracts number 6 covers

German income tax law has no separate category of income for life insurance. Policies sit in the list of investment income in section 20, in its first subsection under number 6. Anyone who receives a payout is therefore, for tax purposes, in the same chapter as an investor collecting interest or dividends.

The provision names two types of contract expressly. First, pension insurance with a capital option, where the customer may choose at the end between an annuity and a single payment. Second, capital insurance with a savings element, meaning the classic endowment policy that pays a sum on maturity or on death.

For pension insurance with a capital option the wording contains an important restriction. The benefit is covered only insofar as the lifelong annuity is not chosen and paid. Anyone who opts for the annuity leaves this number and ends up among the other income types that the second module deals with.

Two events trigger taxation: survival to maturity and surrender. Survival means that the insured person lives to the agreed maturity date and the benefit falls due. Surrender means that the customer cancels the contract early and has the surrender value paid out.

The fourth sentence of the number widens the circle. The rules apply accordingly to unit-linked life insurance and to pension insurance without a capital option, insofar as no lifelong annuity is agreed and paid there. The surrender of such a pension policy is covered as well.

What matters, then, is not the name the insurer gives the product. The question is whether capital flows at the end or a lifelong annuity. A pension policy paid out as a single amount is treated for tax purposes like an endowment policy.

For capital insurance the wording expressly requires a savings element. A pure term life policy that pays only on death and builds up no capital has neither a maturity benefit nor a meaningful surrender value. Number 6 therefore finds nothing in it to attach to.

Finally, the number is tied to a cut-off date. For capital insurance with a savings element it applies if the contract was concluded after 31 December 2004. Older contracts remain under the previous law, which has its own section further down.

The gap: benefit minus premiums

The arithmetic is plain. The total premiums paid for the benefit are deducted from the insurance benefit. What remains is the income. The premiums themselves come back tax-free, because they were paid out of income that has already been taxed.

For Mr Brandt from the opening, the gap comes to 15,000 euros: a 60,000-euro benefit less 45,000 euros of premiums. Only these 15,000 euros matter for tax, not the whole payout. Many policyholders therefore overestimate the burden considerably at first.

Premiums means what the policyholder actually paid into the contract. The annual statements and the settlement at payout show this total. Anyone who has paid into a contract over decades should compare the insurer's settlement with their own records.

A special rule applies where someone did not take out the claim themselves but bought it for consideration. The third sentence then puts the acquisition costs in place of the premiums paid before the purchase. Premiums paid after the purchase continue to count normally.

Taxation happens on receipt. The gap becomes taxable in the year in which the benefit is paid out, not spread across the term. The returns that build up inside the contract during the savings phase remain untaxed until then.

This deferral is one of the core economic ideas of the product. Interest compounds for many years without any current tax, and the account is settled only at the end. The price is that the entire income is bunched into a single year.

Anyone holding several contracts calculates each one separately. The statute ties the gap to the individual insurance benefit and the premiums paid for it. Term, signing date and age at payout are therefore also checked contract by contract.

Whether the gap is then taken in full or only in half, and at what rate it is taxed, depends on the conditions of the second sentence. They are the core of this module and are examined one by one in the next section.

Twelve years and a minimum age: half taxation

The second sentence of number 6 contains the relief around which everything turns in practice. If the benefit is paid out after the taxpayer has completed their 60th year of life and after twelve years have passed since the contract was concluded, only half of the gap is taken into account.

Both conditions must be met at the same time. A long term does not replace age, and an advanced age does not replace the term. A 70-year-old cashing in a contract after ten years gets no relief, and neither does a 55-year-old after twenty years.

The figure 60 in the statute does not, however, apply to every contract. The transitional provision in section 52(28), sentence 7, states that for contracts concluded after 31 December 2011 the benefit must be paid out only after the 62nd year of life has been completed.

What counts, then, is the date the contract was concluded, not the year of payout. A contract signed in 2011 keeps the age limit of 60 even if it is paid out only in 2030. A contract from 2012, by contrast, requires 62, whenever the benefit falls due.

This is precisely where Mr Brandt fell short. His contract dates from 2012, the twelve-year term is met, but he is only 61. The age limit of 62 applies to him, and the entire gap of 15,000 euros is taken into account.

The wording refers to the age of the taxpayer, meaning the person to whom the benefit is attributed as income. Anyone who has taken out a contract on another person's life should therefore check whose age the insurer uses. When in doubt, a written query before the payout is worth it.

According to the wording, the twelve-year period runs from the conclusion of the contract, not from the first premium payment and not from any later reference date. The exact signing date appears on the policy document, and it is worth looking up before any payout.

Anyone close to one of the two limits should pay attention to the payout date. Whether a contract's maturity can be postponed is governed by its terms. A single year's postponement would have meant that only half of Mr Brandt's income was taken into account.

• contract concluded after 2004 and by the end of 2011: payout from the completed 60th year of life
• contract concluded after 31 December 2011: payout from the completed 62nd year of life
• in both cases, in addition, at least twelve years since the contract was concluded
• if one condition is missing, the full gap is taken into account

Contracts before 2005: the old law still applies

For capital insurance with a savings element and for pension insurance with a capital option concluded before 1 January 2005, today's number 6 does not apply. Section 52(28), sentence 5, orders that the version in force on 31 December 2004 continues to apply to such contracts.

The transitional provision contains only the pointer to the old version. Its conditions are not part of the statute in force today, and this course therefore does not reproduce them. Anyone holding an old contract should ask the insurer how it is classified and have that confirmed in writing.

The old law has left its own trace in the withholding rules too. Section 43 names a case under the 2004 version in which the insurer withholds only if it knows from a notice by the tax office that the income belongs to investment income.

For annuity payments from old contracts, the same sentence 5 contains a clear rule. If the holder of such a contract chooses the annuity, it is taxed like any other private life annuity on its yield share under section 22. The second module explains what that means.

In practice, therefore, one date matters above all: the day the contract was concluded. It appears on the policy document. A contract from December 2004 and one from January 2005 can be treated completely differently for tax, even with the same term and the same benefit.

No half taxation without real death cover

The relief of the second sentence depends on a condition found in the policy document, not in the calendar. The sixth sentence excludes it for endowment policies whose benefit on death is too low. A pure savings product in an insurance wrapper is not meant to benefit.

Letter a concerns contracts with ongoing premiums of at least a constant amount up to maturity. If the agreed benefit when the insured risk occurs is less than half of the total premiums payable over the entire term, the threshold is missed.

Letter b looks at the accumulated capital. No later than five years after conclusion, the death benefit must exceed the policy reserve, the current value or the total premiums paid by at least one tenth. This margin may then fall to zero in equal annual steps by the end of the term.

The statute links the two letters with an “and”. Anyone holding a contract with tightly measured death cover should go through both tests with the insurer rather than rely on one alone. The relevant details are in the contract documents.

In practice the question can be settled before the payout. The insurer knows the agreed death benefit, the premium total and the policy reserve, and can confirm in writing whether the contract reaches the thresholds of the sixth sentence. That confirmation belongs with the papers for the tax return.

In time, this requirement does not apply to all contracts. Under section 52(28), sentence 8, it applies to contracts concluded after 31 March 2009 or where the first premium was paid after that day. Older contracts are unaffected.

The consequence of a missed threshold is neither exemption nor taxation of the entire benefit. Only the halving is lost: the gap is taken into account in full, even if term and age are right.

Unit-linked policies, asset management and purchased contracts

In unit-linked life insurance the insurer invests the savings portions in investment funds. The same rules apply to them as to classic policies, including the halving. The ninth sentence adds a relief modelled on fund investment outside an insurance wrapper.

Insofar as the gap stems from fund income, 15 percent of it is tax-free. For a negative gap the wording says the same in mirror image: that share may then not be deducted when the income is determined. Which part of the income stems from funds is shown in the insurer's settlement.

The fifth sentence governs a special case. Where an insurance contract provides for separate management of investments put together specifically for that contract, and the beneficial owner can decide on purchases and sales, the statute speaks of an asset-management insurance contract.

Sentences 1 to 4 do not apply to it. The income flowing to the insurer is attributed directly to the beneficial owner, as if they had held the investments themselves. The tax deferral until payout is thereby lost entirely. Contracts restricted to publicly distributed funds or index investments are not covered.

Anyone who has bought a claim under someone else's contract for consideration is taxed under the seventh sentence even on death. What is taxable then is the difference between the benefit and the costs of acquiring and maintaining the claim, and halving is expressly excluded.

The eighth sentence exempts two situations: acquisition by the insured person themselves, and the transfer of insurance claims to settle compensation claims arising from employment, inheritance or family law. The rules of sentences 7 and 8 apply to insured events occurring after 31 December 2014.