How does life insurance save taxes

Term life insurance: How you can save twice on taxes

When you take out term life insurance to provide for your survivors in the event that something should happen to you, tax considerations also play a role.

On the one hand, you can claim the premiums for term life insurance as special expenses in your tax return. On the other hand, the insurance contract should be designed in such a way that the insurance benefit is tax-free for the surviving dependents in the event of an insured event.

Deduct contributions as a special edition

The legal basis for the deduction of insurance premiums for term life insurance as special expenses in the tax return is Section 10 of the Income Tax Act (EStG).

Among other things, this states that premiums for risk insurances that only provide benefits in the event of death are considered a special expense. The contributions are always to be recognized as other pension expenses.

Other pension expenses may always be deducted from the tax up to the applicable maximum amount. This is up to € 1,900 per calendar year if the taxpayer is granted a tax-free allowance for health insurance. Those who pay their health and long-term care insurance contributions themselves can claim up to € 2,800 per year.

When inheritance tax is due

The tax authorities are also happy to hold out their hands when paying out term life insurance. If the insurance policy is paid out, no income tax is due, but inheritance tax is due. However, this is often not a problem for married couples or children, as high tax exemptions apply here.

According to current tax law, the tax exemption for spouses or partners in a registered civil partnership is € 500,000 and for children € 400,000. However, the situation is completely different for unmarried couples, where the tax exemption is only € 20,000. However, if you consider the following tip, you can avoid inheritance tax entirely.

Tax-free term life insurance: How to avoid inheritance tax

To avoid inheritance tax, whoever is to receive the money in the event of death should take out the insurance policy and insure their partner. In this case, he pays for his own protection in the event of the death of his partner and inheritance tax is waived.

In plain language: Anyone who, as a policyholder, receives a benefit on the basis of an insurance contract for which he has paid the premiums himself, receives the insurance benefit not as an inheritance, but as a contractual benefit and thus tax-free.

An example: An unmarried couple wants to achieve optimal mutual protection by taking out term life insurance for both partners. In the first contract, the woman's life is insured.

You will be included in the application form as an insured person. In contrast, the policyholder and beneficiary in the event of death (the woman) is the man in this contract.

It is the other way around - i.e. crosswise - in the second term life insurance, with which the man's life is to be insured. Here the woman is the policyholder and pays the premiums. The insured person is the man. If something happens to him, the woman receives the insurance sum paid out tax-free.

Particularly interesting for larger assets

This constellation is particularly interesting if there are larger assets and the tax-free amounts are not sufficient to transfer all assets tax-free.

Not only spouses or registered civil partnerships, but also unmarried partners can optimally protect each other in this way. Precisely because in the event of inheritance they can only claim an allowance of € 20,000.

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