Short answer: Life insurance is a traditional pension product, and the tax question depends on the contract. Under section 20(1) no. 6 sentence 2 of the Income Tax Act (EStG), only half of the difference counts as income if payment comes after the age of 60 and after twelve years from contract conclusion. The rule applies to contracts concluded from 2005 onwards (status November 2026). Whether the policy suits you depends on term, costs and your other provisions.
Life insurance policies were once a standard way to build retirement provision, and many people still hold one. Whether a policy still fits your plan cannot be answered in general. This guide sets out the tax key points and the questions to clarify before you decide.
The essentials in brief
- A capital life insurance policy pays out a sum, usually at maturity or on the death of the insured person.
- Under section 20(1) no. 6 sentence 2 EStG, only half of the return counts as income if the conditions on age and term are met.
- The rule applies to contracts concluded from 2005 onwards. Older contracts are not covered in the source used.
- According to the specialist article used here, business expenses can be deducted in full.
- Whether the policy suits you depends on costs, term and your other provision building blocks.
How is the return taxed?
The return is the difference between the payout and the contributions paid in. Under section 20(1) no. 6 EStG, this return falls under capital income with a special rule. Halving applies only if the payout comes after the age of 60 and after twelve years have elapsed.
If one of the two conditions is missing, the return is taxed in full. For this reason, check age and contract term first before any decision on cancellation, payout or extension.
| Condition | Rule | Consequence |
|---|---|---|
| Payout after the age of 60 | Must be met | Without it, no halving |
| Twelve years from contract conclusion | Must be met | Without it, no halving |
| Contract concluded from 2005 | Applies to this rule | Older contracts are not covered here |
When does a life insurance policy fit retirement provision?
A life insurance policy can suit people who want a fixed sum and accept a long commitment. It is inflexible when circumstances change, and costs matter a great deal over a long term.
If you already hold a policy, do not cancel hastily. A surrender can lead to losses, so compare it with continuing the contract or making it paid-up.
Which questions to clarify before deciding
- When does the payout start, and how old will you be then?
- How high are the acquisition costs, and how high are the running costs?
- Which payout form is agreed, capital or pension?
- Does the policy fit your wider plan, for example alongside the statutory pension and the company pension?
What a surrender value means
The surrender value is the amount the insurer pays on early termination. In the early years it is often well below the sum of contributions paid, because acquisition costs and part of the running costs have already been covered. Anyone who cancels accepts this difference. The surrender value should therefore always be set against the future payouts before you decide.
Common misunderstandings
A widespread error is to assume that every capital life insurance pays off automatically. What matters is the term, the costs, the form of payout and the timing of the payout in relation to your life plan. A second error is to think that tax alone decides the contract. Tax is one building block, but not the only one.
It is also worth clarifying whether the policy is meant as protection for dependants or as provision, or both. A life policy can serve both purposes, and these cannot always be separated cleanly. The decision depends on your family situation.
Payout as capital or as a pension
Many contracts allow a choice between capital and a pension, while some offer only one of the two forms. A capital payout gives you flexibility, because you can dispose of the money freely. A pension, by contrast, secures a regular amount for as long as the conditions are met. Which form suits you better depends on your life expectancy, your other income and your need for planning certainty. Make the choice early, because it can often only be changed at certain points.
Assessing the policy against your plan
Set the policy against your other building blocks before deciding. A policy that makes sense alongside a state pension and a company pension may be the wrong choice if it is your only provision. Check how much flexibility you keep, what happens if your income falls and whether the policy still matches your family situation in ten or twenty years.
What a comparison looks like
A useful comparison sets the policy beside other routes, such as the statutory pension, a company pension and an Altersvorsorgedepot. For every route, weigh costs, flexibility, tax effects and protection. Only when all options are calculated with the same assumptions does it become clear which route fits your goal.
Frequently asked questions
Do I always have to pay tax on the return?
Under the rule, part of the return is counted when age and term fit. If the conditions are not met, the full return is counted. Your personal situation also determines the tax.
Is an early surrender worthwhile?
An early surrender can be economically disadvantageous, because the costs of the early years are not fully returned. Compare the surrender values with continuing the contract before you cancel.
Is a life insurance policy better than an Altersvorsorgedepot?
Both pursue different goals. The Altersvorsorgedepot is a subsidised form of private provision, while a life insurance policy pays out at an agreed time. There is no general answer.
Can I draw a pension from the payout?
That depends on the contract. Some contracts provide a payout as capital, others as a pension. The payout form shapes the rest of your planning.
What to do next
- Request the current contract status and the surrender values in writing.
- Check the conclusion date, the term and the planned payout date using the contract documents.
- Compare continuing, making the policy paid-up and cancelling using the same assumptions.
- Have the tax treatment of your case confirmed by the tax office or a tax adviser.
Related guides
- Three-pillar model of retirement provision
- Private pension insurance for starters
- Company pension or Altersvorsorgedepot: which option suits you?
- Altersvorsorgedepot for tax: allowance or special expenses
- Altersvorsorge 2027: The overview of depot, Frühstart-Rente and Riester
Sources: Section 20 Income Tax Act (EStG) (status November 2026), IWW, specialist article on section 20 EStG: taxation of life insurance
Last updated: November 2026. This guide is general information, not individual advice.
