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Life insurance for the repayment of a mortgage - tax disadvantages

December 1, 2015 | 40,00 EUR | answered by Ginster Frank

Hello,
Approximately 20 years ago, I purchased a condominium in Thuringia as a capital investment. A mortgage was taken out, which was made repayment-free and linked to a life insurance policy that will repay the mortgage upon maturity (2025). The apartment has been rented out since then. The mortgage interest (currently 4.85% interest – unfortunately until 2018) is claimed as advertising costs in the tax return. The annual premium for the life insurance policy is not treated as tax-deductible.

Now the question: Normally, the payout of the life insurance policy and thus the repayment of the mortgage is tax-free (correct?). What happens if the amount of the life insurance policy exceeds the mortgage? What is the tax implications of the surplus? Is it tax-detrimental and if so, what needs to be taxed? Only the surplus and only the profit (increase through interest and surplus participation)? Or does a surplus of €1 already have tax implications for the entire life insurance policy? Or best case scenario: Is the surplus tax-free?

Given the current interest rate situation, it doesn't seem likely that the life insurance policy will exceed the mortgage. However, I could consider making special repayments on the mortgage, which would be a very good investment considering the relatively high interest rates. My contract also offers the option of converting the repayment-free mortgage into a mortgage with repayment. In that case, it could be possible for the life insurance policy to exceed the mortgage.

Ginster Frank

Good evening,

basically, at the time of the assignment, a determination notice from the tax authority regarding the tax harmfulness of the assignment should have been issued. If this has not been done, it would first need to be checked whether there was tax harmfulness at that time. As long as the assigned claims from the life insurance policy were not higher than the original acquisition costs of the life insurance policy, this was harmless.
If you have not taken out new collateral in the meantime, for example by taking out a new loan, the matter should not be critical.
Harmfulness does not occur simply because you have a surplus from the life insurance policy and after repaying the loan there is still something left for you.
Ultimately, the matter probably requires an examination of whether your assignment at that time was harmful or harmless.
I hope that we have been able to help you for now.
For further questions, please contact me from Monday at 0049 2232 9345-0.

Have a nice weekend

Frank Ginster