Risikolebensversicherung for Indians in Germany: the payout your family may be taxed on

Term life insurance, Risikolebensversicherung, is the simplest product in German personal finance. You pay a small annual premium, and if you die during the term, a fixed sum is paid out. No savings element, no investment, no surrender value. If you survive the term, you get nothing back, which is the point: you are buying protection, not a product.

For an Indian family in Germany it matters in a specific situation: one income supporting a spouse and children, possibly with a mortgage, in a country where the surviving family's right to stay may itself depend on circumstances. The premium is small enough that the decision is usually easy.

The part that is not easy, and that almost nobody sets up correctly, is who owns the policy, because that single choice decides whether your family receives the money tax-free or hands part of it to the German tax office.

The tax problem nobody mentions at the point of sale

Most people arrange this the obvious way: you take out a policy on your own life and name your spouse as the beneficiary. Intuitively the payout is "their money."

German inheritance tax law does not see it that way. §3 ErbStG defines what counts as an acquisition on death, and it explicitly includes:

"jeder Vermögensvorteil, der auf Grund eines vom Erblasser geschlossenen Vertrags bei dessen Tode von einem Dritten unmittelbar erworben wird."

Any financial benefit that a third party acquires directly, on the death of the deceased, on the basis of a contract concluded by the deceased. A life insurance payout to a named beneficiary is exactly that: you concluded the contract, and on your death someone else receives money because of it.

So the payout is treated as an inheritance, and counted against the beneficiary's inheritance tax allowance along with everything else they receive from you.

Why the allowance decides whether this hurts

§16 ErbStG sets the tax-free allowances, and the range is enormous:

For a married couple, this is usually a non-issue. A €300,000 payout sits comfortably inside the €500,000 spousal allowance, and unless there is substantial other wealth passing at the same time, no tax arises.

For an unmarried partner, it is a serious problem. German inheritance tax does not recognise an unmarried partner as family, however long you have lived together. The allowance is €20,000, and everything above it is taxed in tax class III, which carries the highest rates. On a €300,000 payout that is a very large tax bill on money intended to keep someone in their home.

This lands on Indian couples in a particular way. Many are in Germany before marrying, or married under Indian rites without the German civil registration that creates the legal status German tax law recognises. The emotional reality and the tax status can differ, and only one of them is on the form.

The fix: cross-ownership

There is a well-established structure that solves this, and it costs nothing to set up, but it must be done when the policy is taken out, not afterwards.

The wrong way (single policy, named beneficiary): You are the policyholder, you insure your own life, you pay the premiums, your partner is the beneficiary. On your death, your partner acquires the payout under a contract you concluded → §3 ErbStG applies → counted against their allowance.

The right way (Über-Kreuz, "cross-over" policies): Your partner is the policyholder. Your partner insures your life. Your partner pays the premiums from their own account. On your death, your partner is not receiving a benefit under someone else's contract. They are collecting on their own contract, as its owner. It is their claim, not an acquisition from your estate.

You then take out a mirror-image policy on your partner's life. Hence "cross."

Two conditions matter for this to hold up:

• The policyholder must genuinely be the other person, on the application, not adjusted later.
• The premiums must actually be paid by that person, from their own funds. If one partner pays for both policies out of a single account, the structure is weakened, because the tax office can look at who really bore the cost.

For a married couple with a modest sum insured, the ordinary arrangement is usually fine and simpler. For an unmarried couple, or where the sum insured is large, or where significant other assets will pass at the same time, the cross structure is the difference between a clean payout and a tax assessment.

This is genuinely worth an hour with a Steuerberater before signing. The structure is not exotic, German advisers know it well, but it is not the default, and nobody sets it up for you.

What to insure, and for how long

The two decisions that actually matter:

The sum insured. The common approach is to cover what the family would need to absorb the loss: outstanding mortgage, plus enough to replace income for the years until children are independent. A frequently used rule of thumb is three to five times gross annual income, adjusted for debt, but a rule of thumb is not a calculation, and if there is a mortgage the mortgage balance is the concrete number to start from.

The term. Cover to the point where the need ends, typically when the mortgage is repaid or the youngest child finishes education. Paying for cover past that point is paying for nothing.

Premiums for term life are low compared to every other product in this series, because most policyholders do not die during the term. A healthy non-smoker in their thirties can insure a substantial sum for a modest annual cost; smoking status roughly doubles it, and the health questions carry the same §19 VVG disclosure duty discussed in the income protection guide.

If your beneficiary lives in India

Two points to be aware of, though the detail depends on your circumstances:

German inheritance tax follows German residence, not the beneficiary's. If you are resident in Germany, unlimited German inheritance tax liability generally applies to what passes on your death, regardless of where the recipient lives. A spouse in Chennai does not escape German inheritance tax simply by being in Chennai, and §16 ErbStG notes that allowances can be reduced in limited-liability cases, so being abroad does not automatically help.

India does not levy inheritance tax. It was abolished decades ago, so there is generally no Indian estate tax on the receipt itself. Income subsequently earned on the money in India is taxable in India in the normal way.

Which country may tax what is governed by the India–Germany arrangements and by your specific residence position. If your intended beneficiary is in India, get this checked rather than assuming, the answer turns on facts a guide cannot know.

Before you sign

1. Decide the structure first. Married: ordinary policy is usually fine. Unmarried: use cross-ownership, or accept a €20,000 allowance.
2. If using cross-ownership, pay the premiums from the right account. The structure depends on it.
3. Anchor the sum insured to the mortgage plus income replacement, not to a slogan.
4. Set the term to the need, not to retirement.
5. Answer health questions fully, Indian medical history included.
6. Check whether the policy pays worldwide and whether it continues if you move back, the same question as with income protection.

What we would tell a friend

If you are single with no dependants, you almost certainly do not need this. Nobody is relying on your income.

If someone depends on you financially, a spouse who is not working, a child, a mortgage in one name. This is inexpensive and worth having, and it belongs alongside income protection rather than instead of it. Income protection covers the far more likely event: not dying, but being unable to work.

And if you are not married under German law, spend the hour on the ownership structure before you sign. A €20,000 allowance against a €300,000 payout is not a detail.

Sources

• §3 Abs 1 Nr 4 ErbStG, an acquisition on death includes any financial advantage acquired directly by a third party, on the death of the deceased, under a contract concluded by the deceased.
• §16 ErbStG, the personal inheritance tax allowances by relationship, and the reduction of allowances in cases of limited tax liability.
• §19 VVG, the pre-contractual duty of disclosure applying to the health questions.

Premium levels, worldwide-cover terms and the treatment of a move abroad are contract-specific. The cross-ownership structure is a recognised arrangement in German practice, but whether it achieves the intended result depends on how it is set up and on your circumstances, this guide is general information, not tax or legal advice, and a decision of this size warrants a Steuerberater. Statutory quotations are reproduced from gesetze-im-internet.de.

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