In short: Inheritance tax on life insurance generally applies when the sum insured goes to a designated beneficiary or to the heirs on the death of the policyholder and the recipient’s personal allowance is exceeded (§ 3 (1) no. 4 and no. 1 Inheritance Tax Act, Erbschaftsteuergesetz, ErbStG); to the extent that the recipient demonstrably paid the premiums himself or herself, he or she is not enriched. Spouses have an allowance of 500,000 euros, children 400,000 euros, and unmarried partners only 20,000 euros (§ 16 (1) ErbStG). Income tax generally does not apply to the death benefit.
Many people assume that the payout of a life insurance policy on death remains tax-free because it does not form part of the estate. That is true only on the civil-law side. For tax purposes, the sum insured counts as an acquisition upon death (Erwerb von Todes wegen), so inheritance tax can arise as soon as the recipient’s personal allowances are exceeded. Whether and how much tax arises depends on who took out the contract, who paid the premiums and how the recipient was related to the deceased. This article explains the basic rules, works through an example, shows typical mistakes and addresses the role of premium payment. It reflects the legal position as of October 2026. It is written for readers abroad as well, for example German citizens living outside Germany or foreign families with policies or heirs in Germany. For the special case of moving abroad, read Life insurance after moving abroad.
Basic Rule: The Death Benefit as an Acquisition upon Death
What matters is to whom the insurer pays.
With a designated beneficiary. If a third party is named in the contract as beneficiary (Bezugsberechtigter), that person acquires the claim to the sum insured directly from the insurer; the sum does not fall into the estate. As a rule, the policyholder (Versicherungsnehmer) can name and change the beneficiary without the insurer’s consent. With a revocable designation, the beneficiary acquires the right only when the insured event occurs; with an irrevocable one, already upon the designation (§ 159 Insurance Contract Act, Versicherungsvertragsgesetz, VVG). For tax purposes, under § 3 (1) no. 4 ErbStG every pecuniary advantage counts as an acquisition upon death that a third party acquires directly on the death of the deceased on the basis of a contract concluded by the deceased. This covers the death benefit.
Without a designated beneficiary. If no one is named, the claim falls into the estate and passes to the heirs. The sum insured is then part of the inheritance and is taxed in the hands of the heirs as an acquisition by succession (§ 3 (1) no. 1 ErbStG). It also increases the estate on which the compulsory portion (Pflichtteil) is calculated.
Who is taxed. The person liable to tax is the acquirer, that is, the beneficiary or the heir. Term life and capital-forming insurance. The rules apply equally to term life insurance and capital-forming contracts, as long as the benefit becomes due because of the death of the insured person. Debts. If a beneficiary designation is effective, the beneficiary acquires directly from the insurer; the sum then does not belong to the estate that estate creditors can access. Exceptions, for example in case of contestation, must be examined in the individual case. Children. If a child is the beneficiary, the allowance of 400,000 euros per parent applies; in the case of minors, the legal representatives initially manage the money.
Notification. Before paying out to anyone other than the policyholder, the insurer must notify the tax office of what it pays out (§ 33 (3) ErbStG). The recipient should therefore expect the tax office to ask him or her to file a return. The acquirer’s own duty to notify is three months from knowledge of the acquisition (§ 30 (1) ErbStG).
Income tax. The death benefit is not covered by § 20 (1) no. 6 sentence 1 Income Tax Act (Einkommensteuergesetz, EStG), which concerns only the survival benefit and the surrender of certain contracts. In the typical case where the death benefit is paid to the beneficiary, income tax therefore does not arise, but inheritance tax does. Exceptions apply, for example, if someone has acquired the claim under a contract concluded by another person for consideration (§ 20 (1) no. 6 sentence 7 EStG).
Allowances and Tax Rates
What matters is the recipient’s tax class (§ 15 ErbStG) and personal allowance (§ 16 (1) ErbStG):
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| Recipient | Tax class | Allowance |
|---|---|---|
| Spouse, registered civil partner | I | 500,000 euros |
| Child, stepchild, child of a deceased child | I | 400,000 euros |
| Grandchild (children of living children) | I | 200,000 euros |
| Parents and more remote ancestors (on acquisition upon death) | I | 100,000 euros |
| Siblings, nieces and nephews, children-in-law, parents-in-law | II | 20,000 euros |
| Unmarried partners, friends, other acquirers | III | 20,000 euros |
Spouses and children may in addition receive a pension allowance (Versorgungsfreibetrag, § 17 ErbStG), which is reduced by pension benefits. On the amount above the allowances, the tax office levies tax at the rates of § 19 ErbStG. In tax class I they are 7 percent up to 75,000 euros, 11 percent up to 300,000 euros and 15 percent up to 600,000 euros. In tax class III they are 30 percent up to 6 million euros and 50 percent above that.
Important: acquisitions from the same deceased person are aggregated within ten years (§ 14 (1) ErbStG). Anyone who, besides the sum insured, also inherits or has previously received gifts uses the allowance only once.
Example calculation with assumed figures: Mr. Winter has taken out a term life insurance policy with a sum insured of 300,000 euros and has paid the premiums alone. He dies.
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| Designated beneficiary | Taxable acquisition | Tax |
|---|---|---|
| Wife (allowance 500,000 euros) | 0 euros | 0 euros |
| Daughter (allowance 400,000 euros) | 0 euros | 0 euros |
| Unmarried partner (tax class III, allowance 20,000 euros) | 280,000 euros | 84,000 euros (30 percent) |
The difference shows why the question affects above all unmarried couples, patchwork families and beneficiaries outside the closer family.
Who Paid the Premiums Is Decisive
The death benefit is taxed only to the extent that the deceased conferred the advantage. If the beneficiary paid the premiums wholly or partly himself or herself, he or she is not enriched to that extent. According to the administration’s view (concordant decrees of the federal states of 23 February 2010, BStBl I 2010, p. 194; R E 3.7 (2) Inheritance Tax Guidelines, ErbStR), the insurance benefit is then taxed in the proportion of the premiums paid by the policyholder to the total premiums paid. In its judgment of 18 September 2013 (II R 29/11, annuity insurance against a single premium), the Federal Fiscal Court (Bundesfinanzhof) likewise looked at who paid the contribution. The burden of proof for one’s own payments lies with the beneficiary.
This gives rise to the “cross insurance” arrangement (Über-Kreuz-Versicherung), which is occasionally recommended for unmarried couples. Partner A takes out a policy on the life of partner B and is himself or herself the policyholder, premium payer and beneficiary; partner B does the same on the life of partner A. If one of them dies, the survivor receives the sum from a contract whose premiums he or she bore. According to the administration’s approach, there is then no gift from the deceased, to the extent that the survivor paid the premiums from his or her own funds. The arrangement is common not only among couples but also among partners who run a business together. The insurance benefit is then often planned deliberately as compensation for the disadvantages that the death of a partner causes the company and the surviving partners.
This has prerequisites and limits:
- The premiums must actually have been paid by the beneficiary and must be provable, for example by bank statements. If the partner pays the premiums from a joint account or from funds that the other gave him or her as a gift, the payment is not without more his or her own.
- The policyholder should be permanently both premium payer and beneficiary. A later change of the beneficiary designation or of the policyholder can change the tax assessment.
- Two contracts cause higher costs than one joint insurance, and in case of a separation the contracts must be adjusted.
- Compulsory portion claims of other heirs do not lapse through this construction without more. Whether and to what extent supplementary compulsory portion claims arise depends on the constellation (see below).
- The arrangement itself must also be measured against the general standards on abuse.
Before you implement such an arrangement, you should clarify open questions by a binding ruling from the tax office (verbindliche Auskunft, § 89 (2) Fiscal Code, Abgabenordnung, AO), in case of a foreign connection possibly also by the corresponding ruling in the other state. It binds the tax office only for the specific facts and is subject to a fee (§ 89 (3) to (7) AO); measured against the threatening disadvantages, the fee is as a rule low.
Compulsory Portion and Life Insurance
The sum insured affects the compulsory portion only through supplementary claims, as long as a beneficiary designation is effective.
Because the sum insured does not fall into the estate where there is a beneficiary designation, it initially does not change the amount of the compulsory portion. Persons entitled to a compulsory portion can, however, assert supplementary claims if the benefit is to be regarded as a gift (§ 2325 German Civil Code, Bürgerliches Gesetzbuch, BGB). In its judgment of 28 April 2010 (IV ZR 73/08), the Federal Court of Justice (Bundesgerichtshof) decided that the surrender value of the insurance at the time of death is in principle decisive for the calculation, and not the sum paid out or the sum of the premiums. Whether and how the ten-year period of § 2325 (3) BGB runs depends on the type of beneficiary designation and must be examined in the individual case. This matters for arrangements in connection with a waiver of the compulsory portion; for the basics see Compulsory portion for children: entitlement, amount and enforcement.
Three Mistakes Laypeople Typically Make
1. The beneficiary designation is not kept up to date. After divorce, separation or the death of the beneficiary, the designation often no longer fits. If the spouse is named as beneficiary, then after a divorce the former spouse regularly receives the benefit, not the new one (BGH, judgment of 14 February 2007, IV ZR 150/05). The divorce does not by itself extinguish the beneficiary right; § 2077 BGB does not apply here. The former spouse taxes the benefit in tax class II (§ 15 (1) ErbStG) with an allowance of only 20,000 euros (§ 16 (1) no. 5 ErbStG). After a divorce or a new marriage, the beneficiary designation should therefore be changed in writing towards the insurer. If there is no effective designation, the sum falls into the estate and increases the tax for the heirs, without the insured person having wanted that. Check the designation after every change in family circumstances.
2. The tax is noticed only when the assessment arrives. The insurer reports the payout to the tax office. Anyone who receives 300,000 euros as an unmarried partner has only a 20,000-euro allowance and cannot rely on the allowances of spouses. Liquidity for the tax belongs in the planning.
3. The premium payment cannot be proven. Anyone who relies on his or her own premiums must document them. Without bank statements or other records, the proof is missing and the claim is taxed in full.
When the Policy Disappears
“Money, get away”: some life insurance policies really do disappear.
Life insurance policies disappear more often than one thinks. There are contracts, including from occupational pension schemes, for which the insured person no longer has any documents or memory. Often the heirs remain unaware of the existence of a policy and of the beneficiary, because they learn nothing of the settlement and payout. According to the firm’s experience, some advisers use this deliberately to reduce inheritance and compulsory portions, not legally but in fact, and to favour entirely different persons. Conversely, the insurer sometimes learns nothing of the death, or its mail to the beneficiary comes back as “moved, address unknown”. The insurer could then inform the probate court (Nachlassgericht); according to the firm’s experience, it is regularly rather the expiry of the limitation period that is awaited. Heirs should therefore specifically search the deceased’s bank statements (premium debits), employer documents and correspondence for insurance policies.
Arrangement Options at a Glance
Arrangements start with the beneficiary designation, the policyholder and the premium payment.
- Adjust the beneficiary designation to the allowances. Spouses and children have high allowances; with larger sums it can make sense to divide the sum among several beneficiaries.
- Change the policyholder. If the beneficiary is himself or herself the policyholder and premium payer, the tax burden can be reduced. The gratuitous transfer of an existing contract can, however, itself trigger gift tax; this must be checked beforehand.
- Give the premiums as a gift. Anyone who gives the future policyholder the funds for the premiums triggers gift tax, and the allowances can be used anew every ten years. The gift of the funds does, however, weaken the proof of one’s own payment.
- Minor beneficiaries. If a minor child becomes the beneficiary, the legal representatives initially manage the money. If the use is to be controlled, it must be checked beforehand how this can be achieved, because an executorship (Testamentsvollstreckung) covers the estate and therefore does not without more cover a sum that arises outside the estate by virtue of a beneficiary designation.
- Securing loans. If the insurance is assigned as security for financing, the sum flows to the bank. Less then remains with the beneficiary, and the tax advantage depends on the enrichment.
For an overview of how an estate can be planned through arrangements during one’s lifetime, see the article Transferring assets during your lifetime instead of a will.
Life Insurance and Foreign Connections
Moving abroad does not free you from German inheritance tax immediately.
If the deceased or the beneficiary has a residence or habitual abode in Germany, the acquisition is subject to unlimited inheritance tax liability (§ 2 (1) no. 1 ErbStG). German nationals are still treated as residents for up to five years after moving away, as long as they have not stayed permanently abroad for longer than five years. Moving away therefore does not free you from German inheritance tax immediately. Whether another state levies its own taxes and how this relates to double taxation treaties must be clarified with an adviser on the spot. For the German basics see Inheritance tax and double taxation treaties and Reporting duties for foreign assets in an inheritance.
Deadlines and Costs
The acquirer must in principle report a taxable acquisition within three months of learning of it.
The acquirer must in principle report the acquisition to the tax office within three months of learning of it (§ 30 (1) ErbStG), unless an exception under § 30 (3) ErbStG applies. The insurer reports the payout itself (§ 33 (3) ErbStG). Inheritance tax is set by assessment notice. For advice or the review of contracts, fees arise by agreement or according to the statutory fees; binding amounts cannot be stated in general terms.
Conclusion
The death benefit of a life insurance policy is generally subject to inheritance tax even if it does not belong to the estate. Allowances largely protect spouses and children, but hit unmarried partners and more distant beneficiaries hard. Anyone who demonstrably paid the premiums himself or herself is taxed only proportionately, and the arrangement with cross insurance can make sense if it is implemented cleanly and documented. Decisive are an up-to-date beneficiary designation, proof of the premium payment and planning that takes compulsory portion claims and the liquidity for the tax into account.
Frequently Asked Questions
Is the payout of a life insurance policy on death tax-free?
Income tax generally does not apply to the death benefit. Inheritance tax does arise, however, to the extent that the acquisition exceeds the personal allowance.
Who pays the inheritance tax if a beneficiary is designated?
The beneficiary as acquirer. He or she must expect a request from the tax office, because the insurer reports the payout.
How high is the allowance for the spouse?
500,000 euros (§ 16 (1) no. 1 ErbStG). For children it is 400,000 euros, for unmarried partners 20,000 euros.
Does the sum insured fall into the estate?
As a rule only if no beneficiary designation is (any longer) effective, for example because none was made or the beneficiary predeceased. With a designation, the beneficiary acquires directly from the insurer and the sum does not count towards the estate, but it can play a role in supplementary compulsory portion claims.
Does a cross insurance save inheritance tax?
It can have the effect that the death benefit does not count as a gift from the deceased if the beneficiary actually paid the premiums himself or herself. He or she must prove this. A blanket tax exemption does not follow from it.
Attorney Dr. Johannes Fiala and the law firm, with a focus on international inheritance law, tax law and asset protection in Munich, advise policyholders, beneficiaries and heirs on inheritance tax on life insurance policies, from reviewing the beneficiary designation through structuring the premium payment to coordination with the compulsory portion and estate planning. Dr. Fiala has published extensively on questions of emigration and asset protection. Contact the firm without obligation to have your individual situation discussed in an initial consultation.
