Life insurance in Germany & how it works

Especially for people under 40, life insurance in Germany is very cheap. Moreover, it is especially important if you have children, not many savings, and rely heavily on the income of one or both of you. 

What is term life insurance? 

Term life insurance is designed to protect your surviving dependents in the event of your premature death. When the insured person dies during a specified term, a contractually agreed sum is paid out to the beneficiaries. Term life insurance in Germany is not to be confused with capital-building life insurance, which is a savings product where you pay an annuity for additional pension build-up or pay-out later in life.

Why should I protect myself?

There are two reasons for taking out term life insurance:

1. Your lender requires it for the loan disbursement. This is usually the case if the loan amount is relatively high, or you are the sole earner, and almost the entire purchase price of the property is financed.

2. You want your dependents to be safeguarded. Your property can then be left to your family, for example, without any debt. It is unfortunately not possible to prevent your family from the emotional toll on their life. Still, the payment of the insurance sum can prevent financial worries and even a forced move.

What is the cost of life insurance in Germany?

Life insurance is surprisingly cheap in Germany. Like elsewhere, the cost is based on your life expectancy, and hence, the younger and healthier, the cheaper the life insurance. But in Germany, the insurance industry offers very competitive rates – i.e., they charge limited cost and overhead – besides, you're benefitting from a generally healthy population with low mortality. 

Below you find some indicative estimates of the cost per month of a 100,000 euro insurance for 20 years:

How much insurance should I take in Germany?

There are two simple approaches to deciding on the amount of insurance. 

1. The first is basically to leave your property debt-free. The amount of insurance would then follow closely the size of the outstanding mortgage debt, which over time declines as you repay the mortgage. 
   

2. The second is to specify the minimum free income you would like your surviving partner/family to have. Then, you add up the expected income shortfall to determine the amount of insurance needed. 

We have built a simple calculator for the second case that we can share on request. But the bottom line is usually that you like to insure five to 15 times your annual after-tax income and have it decline over time to zero when your dependents are no longer financially dependent on you. e.g. because the children earn their income, or you build up other savings. The table at the end provides some examples. 

We calculate the optimal amount of your term life insurance.

Do additional features make sense, and which ones are available?

In most cases, the basic protection is sufficient. However, many term life insurers in Germany offer you various additional features for an extra charge. Here are some examples:

• An early (full) payment of the insurance in case you get diagnosed with a serious illness and the life expectancy is less than one year. 

• A prolongation of the insured term without a new health check. 

• A top-up insurance guarantee or increase in the insurance sum in case of certain events, such as the birth of another child.

• Exemption from having to make your monthly payments in case of an occupational disability

Occasionally, these components make sense. But usually, the basic protection is sufficient to either secure your mortgage or safeguard the financial position of the surviving partner.

Which tariff types can I choose from?

With the tariff types, it can be worthwhile to have another look. There are three different, common options for term life insurance in Germany:

• Constant insurance amount

• Linearly decreasing insurance amount

• Annuity decreasing insurance amount

If the monthly premium fits into your budget, the constant insurance amount can give you peace of mind and is also simple to track. Furthermore, this way, the loan is always secured. 

A linearly falling insured sum does not make sense for protecting your mortgage. Because of the initially already fast-sinking insured amount, a gap arises between an open balance on your mortgage and a possible payout from the insurer. 

The annuity falling insurance sum can be calculated individually according to the terms of your mortgage so that the premium is as low as possible and the mortgage is always secured. This solution can also be combined with a constant insurance sum for the first few years, and, for example, the insurance sum will start decreasing in the third year. This option is interesting for the savings-savvy person.

Looking for the best life insurance tariff? Our experts will help you!

Difference between tariff premium (Tarifbeitrag) and payment premium (Zahlbeitrag)

As you might have already seen, there are usually two different prices for life insurance in Germany. One price is the tariff premium, and the other is the payment premium. 

Tariff premium (Tarifbeitrag): this is the price that the insurers calculate internally.

Payment premium (Zahlbeitrag): this is the price that is actually debited from your account each month.

The difference between these two numbers comes from the so-called surplus or profit participation (Überschussbeteiligung). This profit participation is determined every year by the insurer and is calculated based on how well the insurer was able to operate. Were there favorable developments in the capital markets in which the insurer participated, how many (premature) insurance claims were there, and how economically could the insurer work internally? All these factors influence the actual premium (Zahlbeitrag) you have to pay.

We always recommend paying attention to the difference between payment and tariff premiums. Because the tariff premium is the maximum premium you could pay, with some insurance companies, you can easily look at paying 100% more compared to the initial premium at the time of signing up. Competitive and well-managed term life insurers in Germany have a comparatively low tariff premium and an even lower payment premium.

Life insurance pricing

Several specific factors influence your premium apart from age. Factors that are common to all life insurers in Germany:

• Are you a smoker or not? This has a huge impact (see the table above).

• How is your BMI? The relationship between height and weight.

• Do you practice risky sports? For example, mountain biking, skydiving, or motorcycling.

And here are some factors that some insurers consider:

• Your current profession

• An academic degree

• Do you have managerial responsibilities?

• What is the share of office and physical work?