Many of our clients have entered into life or retirement insurance contracts – or maybe even a combination of the two. While this is a great way to financially take care of yourself and your family – after all, only taxes next to death are the only certain things in life – one also needs to be aware of tax consequences when the policy has reached maturity or one is cashing out.
For this aspect it is essential to know when the life insurance contract was entered into. If it was prior to Jan 1, 2005 and you cash out the entire policy, then the entire pay-out is income tax-free, if the following aspects also hold:
- You cash out all at once
- The insurance company has issued the policy and accepted you as client by Dec 31, 2004 at the latest.
- The first premium was paid prior to March 31, 2005.
- You have paid premiums for at least five years.
- Your contributions account for at least 60% of the payout.
When you do not cash it all out, but chose payment in increments, those payments are treated as taxable retirement payments in accordance with § 20 Abs. 1 Nr. 6 a. F. of the German Income Tax code.
Any benefit from contracts entered into on or after Jan 1, 2005, come with income tax consequences regardless. The question only is to which extent. There are cases where you can use the so-called 12/60 or 12/62 rule. Those rules stipulate that when your contract ends or you terminate it, but you
- had the contract going for at least 12 years AND
- payment is made once you reach the age of 60
only 50% of your “profit” becomes subject to German taxation. The age of 60 changes to 62 however, if the contract dates 2012 or later.
Obviously, if the payout is received as a death gratuity German inheritance tax aspects also apply – even more so when NATO-SOFA comes into play!
Anyway, given the above and the stark differences in taxation please let us know if you are thinking about or have already exercised any insurance pay-out option!
Looking for health insurance advice or retirement planning options?
Please reach out to our partners MW Expat Soulution Services GmbH. They’re specialised on tailored solutions for expats in Germany.