When is the payout from a life insurance tax free?
In short
The payout from a life insurance is fully tax free for German contracts signed by the end of 2004 if they ran at least 12 years, premiums were paid for 5 years and death cover was at least 60 percent of premiums. A death benefit is free of income tax. For contracts from 2005 the gain is taxed, only half of it after 12 years and a payout from age 62.
These limits and rates are set by law and apply to every insurer.
Example
Typical range
Contract up to 2004, 12 years, conditions met
EUR 0 income tax
Contract from 2012, 12 years, payout from 62
50 percent of the gain at your personal rate
Contract from 2005, payout before 60 or 62
25 percent flat rate on the whole gain
Saver's allowance
EUR 1,000, joint filers EUR 2,000
Inheritance tax allowance spouse and child
EUR 500,000 and 400,000
As of October 2026.
The worked example with a 30 percent tax rate is a guide value from advisory practice;
your result depends on your rate.
Not tax advice.
Worked example
Contract from 2012, payout at 63
An endowment policy ran 14 years. EUR 40,000 was paid in, EUR 52,000 is paid out.
Gain
EUR 12,000
Taxable after 12 years and from 62
EUR 6,000
Tax at a 30 percent personal rate
EUR 1,800
Compare: payout at 60
25 percent on EUR 12,000, EUR 3,000 plus surcharge
Waiting two years saves about EUR 1,200 of tax here. Before an early surrender, check when you turn 62.
Old contracts up to 2004: often fully tax free
For life insurance signed before 1 January 2005 the old law still applies. The payout is fully tax free if the contract ran at least 12 years. For endowment policies (Kapitallebensversicherung) two more conditions apply: at least 5 years of premium payments and death cover of at least 60 percent of all premiums due.
Most classic old contracts meet these conditions. Still check your policy, especially single premium contracts or very short premium periods.
Contracts from 2005: the gain counts
Since 2005 the difference between payout and premiums paid is taxable. If you paid in EUR 40,000 and receive EUR 52,000, EUR 12,000 is income.
Only half counts if two conditions are both met: at least 12 years since signing and a payout after the 60th birthday, for contracts from 2012 after the 62nd. That half is taxed at your personal income tax rate. For contracts from April 2009 the law also requires minimum death cover.
If a condition is missing, the whole gain bears 25 percent flat rate tax (Abgeltungsteuer) plus solidarity surcharge and church tax where due. The insurer first withholds tax on the full gain. If you qualify for half taxation, you reclaim the rest through your tax return.
Contract and payout
What is taxable
Rate
up to 2004, 12 years, conditions met
nothing
none
from 2005, 12 years, payout from 60
half the gain
personal rate
from 2012, 12 years, payout from 62
half the gain
personal rate
from 2005, a condition missing
whole gain
25 percent flat rate
death
no income tax
possibly inheritance tax
On death: no income tax
Income tax under section 20 of the Income Tax Act only applies to payouts on survival or surrender. The death benefit paid to survivors is not covered by it.
It can trigger inheritance tax if the deceased was the policyholder and someone else receives the money. Allowances are high: EUR 500,000 for spouses and registered partners, EUR 400,000 for children. Unmarried partners only get EUR 20,000; it helps if the partner is the policyholder.
A pension instead of a payout
If you choose a lifelong pension instead of a lump sum, only the income share (Ertragsanteil) is taxed, based on your age when the pension starts: 18 percent at 65, 17 percent at 67. That also applies to old contracts with a pension option when you take the pension.
Unit-linked policies and health insurance
With unit-linked life insurance, 15 percent of the returns stay tax free before halving. The 12 year and age rules apply the same way.
Tax free does not always mean free of health insurance contributions. A privately signed life insurance is contribution free for members of the statutory pensioners' health insurance, an employer direct insurance is not. We explain this on a separate page.
When the tax question stays small
For small gains the saver's allowance helps: EUR 1,000, or EUR 2,000 for couples filing jointly. If the gain stays below it and you have no other investment income, you pay nothing on the payout from your life insurance in the end. Give the insurer an exemption order (Freistellungsauftrag) beforehand.
Step by step
Find the signing date in the policy: before or after 1 January 2005, before or after 2012.
Count the years from signing to payout.
For old contracts check premium period and death cover.
Give the insurer an exemption order.
After the payout claim half taxation in your tax return.
Checklist
Year of signing known
12 years met
Age at payout at least 60 or 62
Exemption order given
Policyholder and beneficiary checked for the death case
Common mistakes
Cancelling shortly before the 12 years are up
Taking the payout at 61 when the contract qualifies for half taxation only from 62
Not reclaiming excess withholding through the tax return
Unmarried couples overlooking inheritance tax on death
Questions and answers
Frequently asked
Do I have to declare the payout in my tax return?
Not for a tax free old contract.
For newer contracts yes, if you want half taxation,
because the insurer first withholds tax on the full gain.
What applies if I surrender the policy?
The same rules apply to the gain.
Without 12 years and the minimum age, the whole gain is taxed at 25 percent.
Is the payout to my children after my death tax free?
No income tax applies.
For inheritance tax each child has an allowance of EUR 400,000.
Does the tax exemption apply to an old contract with a pension option?
If you take the capital, old contracts follow the old law.
If you take the pension, only the income share is taxed.
How much does the insurer withhold?
First 25 percent capital gains tax on the full gain,
plus solidarity surcharge and church tax where due.
