In Germany, life insurance policies are regarded as very secure, even if the insurer becomes insolvent. In an emergency, statutory protective mechanisms take effect: all contracts of a struggling company can be transferred to the statutory guarantee fund (“Protektor”).
This private protection fund is financed by all German life insurers. It continues the policies it takes over, pays out guaranteed benefits and maintains the risk cover. However, the customer does not receive a one-off compensation payment – instead, the contract simply continues as before. Following a restructuring, the policies may, with the approval of the supervisory authority BaFin (Federal Financial Supervisory Authority), also be transferred to another financially sound insurer. In individual cases, BaFin may additionally permit a slight reduction of the contractual guarantees (under § 222 VAG (German Insurance Supervision Act), by up to five per cent) where this is necessary to rescue the insurance portfolio.
As a general rule, the claims of the insured persons rank first in any insolvency proceedings. If the insurer’s collapse cannot be brought under control through a Protektor takeover, the supervisory authority has further legal powers of intervention, such as a provisional ban on payments or the adjustment of tariff rules.
Conventional and Unit-Linked Life Insurance in an Emergency
In principle, both conventional capital-forming life insurance policies and unit-linked policies are protected. With conventional contracts, the payout is based on guaranteed benefits that are held in the insurer’s so-called guarantee assets and continued within the Protektor fund. With unit-linked policies, the investment assets are allocated to the insured persons (the “investment pool”). By law, these assets may be used first to settle claims in the event of insolvency (§ 125 VAG). In practice, this means that the fund investments are preserved and transferred to Protektor together with the contract.
The difference is that the return and value of a unit-linked policy vary according to the current performance of the underlying funds. At the same time, these assets are strictly separated from the capital of other policyholders. Even if the insurer is in financial difficulty, the investment assets remain intact. Both types of contract continue to be administered and paid out – it is simply that, during the restructuring phase, a “backing insurer” (Protektor) looks after your money. Your retirement capital therefore remains largely secure even in extreme cases.
Life Insurance in Personal Insolvency
If an insured person becomes personally insolvent, the money from their life insurance policy initially forms part of the insolvency estate. The insolvency administrator can normally terminate the contract and realise the surrender value. In certain cases, however, exceptions apply:
- Irrevocable beneficiary designation: If the insurance contract provides for an irrevocable beneficiary (for example, the spouse or a child), the insured sum does not fall into the insolvency estate. The insolvency administrator cannot change the beneficiary designation. The payout is made directly to the named person. The policy thus effectively remains outside the proceedings.
- Revocable beneficiary designation: Without a bindingly designated beneficiary, the policy belongs to the debtor’s assets. It can then be realised in the insolvency proceedings – the surrender value flows into the estate.
- Assignment to third parties: If the claims under the policy were assigned to a third party before the insolvency (for example, within the family without consideration), the contract can be separated from the estate. This means that the new recipient can demand the payout. It is important that the assignment took place in good time and in the legally required form. Otherwise, a challenge on the grounds of gift (avoidance of a gratuitous transfer) may be threatened.
- Assignment by way of security: If the policy merely served to secure a loan (the bank held a “security interest”), the insolvency administrator can nevertheless access the contract. Although the administrator must pay the proceeds to the secured creditor, the contract itself remains part of the insolvency.
- Attachment: If a creditor obtained an attachment and transfer order against the insurance contract before the insolvency petition, they were able to divert money. Once insolvency is opened, this attachment title normally loses its effect, provided it was obtained shortly before or after the insolvency petition. Successful attachments well before the opening of insolvency, by contrast, remain in place.
For those affected, this means that all rights under the policy can only be fully protected if you take action before insolvency sets in. A late arrangement of beneficiary rights, a subsequent transfer, or an attempt to convert the contract into a non-attachable capital life or pension insurance only takes effect before the proceedings are opened. Once personal insolvency has already been opened, the insured person has little influence over how their contract is realised.
Protective Measures for Policyholders
In order to be prepared for a crisis at the insurer or for impending personal insolvency, the following steps may be considered:
- Examine a right of withdrawal: Under certain conditions, an existing life insurance contract can be unwound. For example, if the contract was concluded some time ago and contains defective notices or unclear terms (frequently the case with older contracts), it may sometimes still be possible to exercise a right of withdrawal today. The premiums paid in are then refunded (less the benefit derived). A withdrawal is particularly worthwhile where the contractual terms are ambiguous or significantly less favourable than current alternatives. Dr. Johannes Fiala and his team can advise whether such a withdrawal is possible in your case.
- Termination or cancellation of the contract: Anyone who needs liquidity at short notice can terminate the policy and receive the surrender value. While this reduces the later insurance cover and any surplus participation, it immediately creates funds for the insolvency estate (or to service debts). However, termination should be carefully considered: you lose future pension payments and guarantees. It is therefore usually only sensible where no better options exist.
- Sale or transfer of the policy: Life insurance policies can today often be sold to specialised buyers (a “policy sale”). In this case, the contract is transferred in full and the buyer pays a one-off purchase price (usually well below the surrender value). For the policyholder, this means immediate cash, but a permanent surrender of the contract. A gift or assignment to close relatives can likewise remove the surrender value from the insolvency estate, provided it is done in good time (and with tax considerations in mind).
- Beneficiary rights via third parties and structuring: In addition to the classic “irrevocable beneficiary designation”, there are also trust arrangements or marital agreement structures that securely isolate money from the influence of an insolvency. Often, for example, a partial capital sum or a pension guarantee is transferred to third parties. Such constructions are complex and must be implemented in a legally sound manner. Professional advice (for example from Dr. Johannes Fiala) is strongly recommended before appointing family members or friends as beneficiaries.
- International policies and foreign structures: Some policyholders consider relocating parts of their provision to providers abroad – for example to Luxembourg or Austria, where different rules may apply. However, German insurance contract law always applies to German companies or German branches. While a foreign contract may offer additional protection, it is subject to different supervisory regimes and tax rules. This step is highly complex and should only be undertaken with professional advice.
Recommended Action and Personal Advice
For most private investors, the rule is: stay calm. Life insurance policies in Germany are very well protected by the Protektor guarantee fund and strict supervisory rules. First check whether you have already established an irrevocable beneficiary designation in favour of a person close to you. If not, consider whether, in an emergency, a withdrawal or a restructuring of the contract might be an option. If insolvency is looming or you have any doubts, get in touch with specialists at an early stage.
Dr. Johannes Fiala offers individual advice to identify, together with you, the best possible steps. He and his team analyse your insurance contract and your financial situation in order to protect you from a possible loss of assets. Arrange a personal consultation – this allows you to discuss all options at an early stage and optimise your asset protection. With professional support, the pitfalls surrounding the subject of “life insurance and insolvency” can be navigated with confidence.
Arrange an appointment now: For any further questions about your life insurance, termination or withdrawal, you can contact Dr. Johannes Fiala directly. We will help you create security for your retirement provision.
