Direct insurance is life insurance that the employer takes out for an employee.
The direct insurance
Direct insurance is life insurance that the employer takes out for his or her employees. The employer usually forwards the contributions of his employees to the insurance company via the gross salary conversion . However, contributions can also be saved through net salary conversion, also in combination with the Riester subsidy.
However, direct insurance is currently not particularly lucrative – because of the low guaranteed interest rate and the high administrative costs of the insurance groups. Interest does not accrue on the entire customer deposit, but on the part that remains after deducting the closing costs.
Because every employee is entitled to a company pension scheme, the employer must offer at least one direct insurance – unless there are other models in the company.
Unit -linked direct insurance is also possible , in which the contributions flow into investment funds. On the one hand, this means higher return opportunities – especially with a long term – but the risk is also higher. There is no guaranteed interest rate here.
Additional components such as protection for surviving dependents or occupational disability insurance are often possible with direct insurance, but they cost extra.
Since the employee’s claims are against the direct insurer and not against the employer, the money is safe in the event of the employer’s insolvency . The money is secured by the life insurers’ security fund.
This is how gross salary conversion works
As a rule, employees pay in their contributions to the company pension scheme via gross salary conversion. The employer pays part of your gross income before tax deduction into a contract, for example into a life insurance policy from a provider of your choice.
In order for the payments to remain tax and social security-free , certain maximum limits may not be exceeded. The maximum limits are redefined by law every year.
Employees can pay in annually…
- tax-free up to 8 percent of the contribution assessment limit = 6768 euros per year or 564 euros per month (as of 2022)
- social security-free 4 percent = 3384 euros per year or 282 euros per month (as of 2022)
There is also a minimum contribution for deferred compensation. In 2022 you will have to convert at least EUR 246.75 per year or EUR 20.56 per month.
Your gross salary is reduced as a result of the gross salary conversion. Of course, this means that less ends up in your account, but wage tax, church tax and social security contributions are only due on the correspondingly lower gross income. So you initially pay less taxes and social security contributions . Only in old age, when you receive your company pension, does the state demand taxes and social security contributions – but then usually significantly less.
Disadvantage: If you pay less into the statutory pension and unemployment insurance, you will also receive correspondingly lower benefits, i.e. a lower statutory pension or less unemployment benefit .
Employers have to pay a subsidy
Employers also save around 15 percent on social security contributions with the gross salary conversion. Employers must therefore subsidize the contracts of the employees with 15 percent of the converted remuneration (up to the contribution assessment limit). Since 2022, this also applies to old contracts that were concluded before 2019.
Rules for legacy contracts (concluded before 2004)
For old contracts that were concluded before 2004, other tax rules apply in the payment phase: taxes of 20 percent are levied on contributions up to an amount of 1,752 euros per year. With the solidarity surcharge and church tax, the total tax rate is around 21.5 percent. Payments from holiday or Christmas bonuses are taxed at a flat rate and are exempt from social security contributions.
If the capital saved is later paid out all at once, it remains tax-free. If it is paid as a monthly annuity, tax is paid on the income portion, i.e. the part of the capital that has accrued through interest over the years.
Advantages of direct insurance
- In the current phase of low interest rates, there is only a chance of a better return if the employer contributes the ancillary wage costs saved through gross salary conversion. Since 2019, he has had to add 15 percent of the converted salary (up to the contribution assessment limit), unless otherwise agreed in the collective bargaining agreement.
- You usually have a guaranteed pension, even if it is low (definitely check alternatives!). From 2019 it will also be possible to conclude contracts without a guaranteed pension within the framework of collective bargaining agreements (” pure contribution commitments “). The advantage here is a higher chance of return, but the risk of loss is also higher.
Disadvantages of direct insurance
- The guaranteed interest rate for life insurance is currently very low: direct insurance policies taken out by the end of 2003 guarantee a minimum interest rate of 3.25 percent on the savings portion. Since then, the guaranteed interest rate has been reduced further and further and was 1.25 percent in 2015, since 2017 it has only been 0.9 percent. In addition, there are the surplus shares that are usual with endowment life insurance and private pension insurance. However, they are not guaranteed.
- The fees and administration costs for a policy vary depending on the insurance company and can mean that the premium payments from the first few years are not used for retirement provision. If the employer negotiates a group tariff for its employees, the costs are usually lower.