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Whole life insurance: Premium waiver tax disadvantageous?

February 20, 2011 | 60,00 EUR | answered by Michael Herrmann

Is a premium waiver of the life insurance policy described below from 1.6.2011 until the end of the contract harmful for tax purposes and why, or why not?

- Purpose of the contract: Securing a repayment-free loan in the event of survival (financing the purchase of a property for rental and self-use)

- Start of the term 1.6.1995, expiration 1.6.2015, premiums have been paid continuously.
(From 1.2.2004 payment not monthly, but annually, resulting in a lower annual premium of approximately €100.)

- 1997 Notice from the tax office regarding the separate determination of the tax liability of interest from life insurance: Not subject to income tax due to notification according to § 29 EStDV.

- After ten years of refinancing: The initial loan was repaid (with own funds and the follow-up loan from a cheaper second bank). Since then, there has been a correspondingly reduced, repayment-free loan with the second bank.

- 2005 Notice from the tax office regarding the separate determination of the tax liability of interest from life insurance: Not subject to income tax due to notification according to § 29 EStDV.

- The guaranteed benefits of the premium-free insurance are lower due to the premium waiver than originally planned at the start of the contract without the premium waiver. Possible surplus shares, basic participation, etc. are also lower (except for the premium-free benefits guaranteed from surplus shares at the end).

Perhaps of importance:

- For the transition to premium waiver, the insurer will make a deduction.
(§5 of the General Insurance Conditions of the insurer: "The amount available from your insurance for the formation of the premium-free insurance sum is reduced by a deduction, which is determined as a percentage of the amount available. This percentage decreases according to an actuarial method from 9% at the beginning of the insurance to 0% at the end of the agreed premium payment period. However, the reduced insurance sum reaches at least a premium-free insurance sum guaranteed at the time of the contract, the amount of which depends on the time of termination of the premium payment.")

Michael Herrmann

Dear questioner,

first of all, thank you for your inquiry, which I am happy to answer based on the information provided and in the context of your initial consultation. The response will be in accordance with the facts stated. Missing or incorrect information about the actual circumstances can affect the legal outcome.

For contracts concluded before 2005, the insurance benefit in the event of survival or surrender (cancellation) remains tax-free after 2009 and is not subject to the flat-rate withholding tax, if

- the contract term is at least 12 years,
- premiums are paid continuously for at least 5 years,
- the death benefit is at least 60% of the sum insured, and
- the insurance benefits are not used for tax-damaging financing purposes.

Your contract meets these requirements according to the certificate from your tax office and the presentation of the facts.

Many life insurance policies undergo changes during their "long life" regarding the sum insured, contract term, or premium amount and duration. What are the tax implications of your contract change regarding premium exemption?

Since the insurance contract is subsequently modified in a defining feature such as premium amount and duration, the following applies (BMF letter of 1.10.2009, BStBl. 2009 I p. 1172, para. 69 et seq.):

- If the contract term or premium duration is subsequently shortened, premiums or sum insured reduced, the modified contract is tax-wise treated as an "old contract" that is continued. These changes are disregarded for assessing the minimum contract term, unless the total contract term of twelve years is undercut.

You can see that there are no changes in case of premium and benefit reductions. Only the minimum contract term must be fulfilled.

I hope that these explanations have given you a sufficient overview of the situation within the scope of your inquiry and this initial consultation.

Yours sincerely,

Michael Herrmann
Dipl.-Finanzwirt (FH)
Tax consultant