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Questions & answers on life and pension insurance

What are the essential features of life insurance, pension insurance and funeral expenses insurance?


A life insurance policy provides economic coverage of the biometric risk (e.g. death, longevity, (occupational) disability) of the insured person. In a life insurance contract an insurance benefit is agreed which on occurrence of the contractually agreed insured event – usually death during a certain time (whole life insurance, e.g. term life insurance or residual debt life insurance) or survival of a certain time (insurance on survival to a stipulated age) – is paid out to the policyholder or other beneficiary party. One common form is endowment insurance, which provides both death and survival benefits (also in the variant of unit-linked life insurance).

Another type of life insurance is private pension insurance. It guarantees a lifelong pension payment or a lump sum payment on retirement. In the event that the insured person dies before the agreed commencement of retirement, it may be agreed that at least the premiums paid in or an agreed death benefit value is paid out to eligible beneficiary survivors.

Funeral expenses insurance in the form of industrial life insurance (also known as small death benefit insurance) is taken out to cover funeral costs. The insurance benefit is referred to as the funeral expenses grant. Funeral expenses insurance business is generally operated by funeral expenses funds in the form of small mutual associations.

What are the special features of unit-linked life insurance?

With the "classic" form of unit-linked life insurance, the only guaranteed sum is the one payable in the event of death. The sum payable on survival (the sum payable on maturity of the policy or, if the policy is terminated before the maturity date, the surrender value), on the other hand, does not have any particular guaranteed amount. As with "normal" endowment insurance, parts of your premiums are used to repay the acquisition costs and for the life cover. The savings portions of your premiums do not, however, earn interest at a particular rate but are used to buy units (or shares) in investment funds. The value of your unit-linked life insurance policy will therefore depend on the performance of the fund or funds in question and may consequently fluctuate, often substantially.

Managing fund units generates costs which are deducted from your premiums. Fund investments also generally incur initial charges which have to be paid up-front out of your premiums.

These charges reduce the return on your unit-linked life insurance policy. Many insurers allow you to switch funds during the term of the contract. This usually involves additional costs.
The profit potential of unit-linked life insurance is normally higher than with "normal" endowment insurance. But at the same time you are also exposing yourself to the risk of suffering a loss if your fund or funds perform poorly.

You can now also find unit-linked life insurance policies on the market that guarantee a certain minimum sum payable. Here there is no risk of the entirety of the premiums paid in being lost. These policies either invest only a part of the savings portion of your premiums in fund units, or the savings portions are invested in what are known as "guaranteed funds". As with any investment options, the principle that also holds true here is: the lower the risk of loss, the lower the profit potential (and vice versa).

If you want to terminate your unit-linked life insurance policy, you should monitor the fund’s current price performance and wait for a favourable moment.

If your unit-linked life insurance policy matures just at a time when the value of the fund is depressed, you should consider whether you want to be paid the current monetary value of your policy or whether you would prefer to have the units carried forward. In the latter case you have the prospect of selling the units at a better price later, when prices are rising again. With many policies it is also possible to defer expiry of the contract for a certain time until, in this instance, the price situation is once again more favourable. Check the provisions of your terms and conditions of insurance or ask you insurer about ways to avoid losses.

If you are relying on being paid a particular sum of money at a specific time – e.g. for the purpose of repaying a loan – you should consider whether you are really prepared to assume the investor risk associated with unit-linked insurance.

Where can I get information on certification of the so-called "Riester" and "Rürup" pensions?

You can obtain information on certification of the "Riester" and "Rürup" pensions from the Bundeszentralamt für Steuern (BZSt)