Munich in English - selected by independent Locals for Cosmopolitans, Newcomers and Residents - since 1989

back to overview

November 1999

Your money or your life

An explanation of various life insurance policies available and their benefits

Few things get germans as worked up as the thought of missing out on a tax break. The latest victim is life insurance (Lebensversicherung). It looks as though the government will abolish the tax-free status of certain payouts from policies taken out after December 31. Existing policies will not be affected. As a result, the life insurance industry has been bombarding us with pleas to sign up now before we miss the boat. Before doing so, you should consider whether, even with the tax break, life insurance is sensible for you. Many people are confused about exactly what life insurance is. This is not surprising: in many policies, the “insurance” element is minimal. Instead, they are primarily savings plans. There are basically two types of life insurance policy. The first — Risikolebensversicherung — insures you, as the name suggests, against the risk of dying within a specified period (say, up to age 60). If you do die, your dependants receive a pay out. If, on the other hand, you survive the term (i.e., reach age 60, in this example), you get nothing. Such policies, which anybody with dependants should probably have, are very cheap. For example, a 30-year-old man could insure himself for DM 100,000 till the age of 60 for as little as DM 150 a year. The second type is Kapitallebensversicherung. This also insures you against death, but most of your money goes into a savings plan, which pays a lump sum to you if you survive the term. For the same insurance sum as above, the annual payment would be about two thousand marks. At present, payouts from most life insurance policies are tax-free as long as they run for at least 12 years. The government plans to tax the “survivor” payouts from Kapital policies. Payouts in the event of death — on both Risiko and Kapital policies — will remain tax-free. So, should you rush out and sign up for a Kapital policy now, before the tax break is rescinded? Almost certainly not. Even with tax-free payouts, such policies are not generally a very good investment, partly because of hidden administration and commission charges. Such long-term savings plans are also very inflexible: if you want or need to cancel your policy early, you lose considerably. Only in very few cases is a Kapital policy worth considering: • If you can deduct your payments into the policy from tax. In practice this applies mainly to the self-employed. The government plans to end this tax break, too; • If you use the policy to pay off a mortgage on a property you are renting out; • If the life insurance is paid via your employer (Direktversicherung). This has extra tax advantages. Otherwise, you should make a clear separation between genuine life insurance, and savings, which can usually be done more flexibly and profitably via bonds, stock, investment funds, property, etc. In light of the decreasing attractiveness of Kapital policies, many companies are pushing Rentenversicherung (pension insurance) policies instead. Such policies are, again, basically savings plans: instead of a lump sum payout, however, you choose annual payouts for as long as you live beyond a specified age. Nevertheless, such policies suffer from many of the same disadvantages as Kapital life insurance. Before taking out any new policies, seek independent advice, for example from your tax advisor. And have safe and happy holidays! <<<

tell a friend