Working Life > Retirement Arrangement > Direct Insurance

Direct Insurance for Employees

Definition, Explanation

One form of a company pension scheme, or company old-age provision, is the direct insurance which is a special form of a life insurance.

In a company pension, the employer (as the policy holder) takes out a life insurance policy on behalf of the employee. So the direct insurance benefit will be paid out to the employee or to the employee’s surviving dependents. Direct insurance contributions are paid by the employer. Therefore, the contributions, in a sense, are regarded as income which goes into company pension as sacrificed compensation.

Contributions:

• Up to 4 % of the contribution assessment ceiling (Western Germany), i.e. in the year of 2011 up to 2,640 Euros per year, plus 1,800 Euros fixed amount are taxless. Whereas the additional, fixed amount is subject to compulsory social insurance deductions
• Contributions are paid by the employer, as sacrificed compensation or deferred compensation
• Dates of paying the contributions can be monthly, quarterly or annually

Sub-forms of direct insurance:

• Private pension insurance
• Cash-value life insurance
• Unit-linked life insurance

Direct insurance and tax:

• Although the contributions are taken off the employee’s income, they are exempt from income tax
• 2,640 Euros per year are the maximum to be contributed without tax

Payments from a direct insurance:

• Are paid to the insured employee or the employee’s surviving dependents when the policy period has ended, and the employee is at least 60 years old
• The form in which benefits are paid to the insured employee can be either be a monthly pension (old age pension) until death, or a one-time benefit (capital payment)
• Partly payments are also possible (30% of the capital) and the rest in form of a monthly pension
• Surviving dependents receive payments until the end of the contracted pension period
• No corresponding reduction in unemployment benefit II is effected
• According to retirement income act (Alterseinkünftegesetz), the benefits are taxed when paid
• Even when your employer should go bankrupt, your direct insurance benefit entitlement is secured by the Pension Security Association

Direct insurance and social insurance:

• The contributions to a direct insurance are exempt from social insurance contributions
• The benefits from a direct insurance are regarded as income and are subject to contributions for health insurance and nursing care insurance

Tips, Checklist

• Get informed in your personnel department about possibilities regarding direct insurance. The employer is obliged to offer you some company pension
• Compare benefits, contributions and payment forms of different insurers
• When you change employers, you can take your direct insurance and have it continued by your new employer
• When you change jobs or you go into business for yourself, you can pay your contributions to direct insurance yourself or have your contributing suspended, making the insurance a non-contributory
• Direct insurance can only be contracted via the employer in your main job, not in a side-line job
• Possibly use your capital accumulation compensation, or your Christmas bonus or holiday pay to pay the contributions to the direct insurance
• What makes direct insurance attractive is the fact that contribution payment is free of tax and social insurance deductions and thus reduce the part of one’s income that is taxed by sacrificed compensation. Even though the benefits are taxed when received, normally the final balance is advantageous to the insured because of the lower tax rate for pensioners
• Also minijobbers and self-employed may be interested in direct insurance, since it is an insurance without benefit entitlement being able to be cancelled, with contribution payments being able to be suspended, and cannot be distrained
• Think whether the parallel contracting of a “Hinterbliebenenabsicherung” (security for surviving dependents) or of an occupational disability insurance is beneficial for you
• Possibly use the Riester-support for direct insurance
• Note:
  The term Direktversicherung is misused frequently for any insurance that is contracted completely online, which can be various kinds of insurances. Those insurances, however, are nothing like a direct insurance as old-age provision!

Last update: 02/03/2011