Insurance basics in Germany: essential, useful and usually unnecessary policies (general orientation)

What you will learn

• The basic rule for deciding what to insure: severity before probability.
• Which policies are mandatory or essential for most people in Germany.
• Which policies depend on your situation and which are usually unnecessary.
• How to judge a deductible with a simple break-even calculation.

Explanation

This lesson is general orientation, not individual advice. Insurance needs depend on your family, job, health and property. For a neutral review, consumer advice centres (Verbraucherzentralen) and independent fee-based advisers (Versicherungsberater) are options; commission-paid agents have an interest in selling.

The key rule: insure what could ruin you

An insurance premium is the price you pay for cover. On average, policyholders as a group pay more in premiums than they receive in claims, because the insurer must cover its costs and profit. Insurance is therefore worth buying when a loss would be too large for your savings, even if it is unlikely. Small, affordable losses are cheaper to carry yourself through the emergency fund (Lesson 3). This is called self-insuring.

Ask two questions for every policy: (1) What is the maximum loss without it? (2) Could my emergency fund pay that? If the answer to (2) is yes, the policy is usually not essential.

Mandatory cover

• Health insurance (Krankenversicherung): everyone living in Germany must have it, either statutory (gesetzlich) or, for eligible groups, private. Long-term care insurance (Pflegeversicherung) is linked to it.
• Motor third-party liability (Kfz-Haftpflicht): required by law for every registered vehicle.

Essential for most people

• Personal liability insurance (Privathaftpflichtversicherung): under German civil law you are liable for damage you cause to others, without an upper limit. Injuring someone in a bicycle accident could cost more than a lifetime's savings. Choose a high cover amount (several million euros).
• Occupational disability insurance (Berufsunfähigkeitsversicherung): if you depend on your income, losing the ability to work in your job is one of the largest financial risks. Statutory benefits for reduced earning capacity are generally limited. Premiums depend on age, job and health; answer health questions completely and truthfully.
• Term life insurance (Risikolebensversicherung): essential if someone depends on your income or you have a mortgage; usually unnecessary for single people without dependants.

Useful depending on your situation

• Household contents (Hausrat): useful if replacing your belongings would exceed your savings.
• Buildings insurance (Wohngebäude): essential for home owners, including cover for natural hazards (Elementarschäden) depending on location.
• Travel health insurance abroad (Auslandsreisekrankenversicherung): statutory health insurance covers little or nothing outside the EU, and medical repatriation can be very expensive.
• Legal expenses (Rechtsschutz): depends on your dispute risk; check exclusions.

Usually unnecessary

Policies for small, affordable losses: phone or gadget insurance, glasses insurance, luggage insurance, extended warranties, and often payment protection insurance sold with consumer loans (Restschuldversicherung), which can raise the cost of a loan considerably.

Deductibles

A deductible (Selbstbeteiligung) is the part of each claim you pay yourself. A higher deductible lowers the premium. It pays off if you claim rarely and your emergency fund can absorb the deductible.

Break-even years between claims = deductible increase ÷ yearly premium saving

Worked example

Hypothetical example: all premiums and amounts are invented round numbers, not market prices.

Part A: phone insurance. Premium €8 per month, deductible €50 per claim, phone value €600. Two-year premium cost = €8 × 24 = €192. If the phone is stolen, the insurer pays at most about €600 − €50 = €550. Maximum loss without insurance: €600, which Lena's €7,250 emergency fund can pay. Verdict: self-insure.

Part B: personal liability. Premium €60 per year (assumed) for €10,000,000 cover. Maximum loss without it: no upper limit and possibly far beyond any savings. Verdict: insure.

Part C: deductible choice for household contents. Option 1: €0 deductible, €120 per year. Option 2: €150 deductible, €90 per year. Saving = €120 − €90 = €30 per year. Break-even = €150 ÷ €30 = 5 years. If you expect to claim less often than once every five years and can pay €150 from savings, option 2 is cheaper over time.

Common mistake

Practice activity

Hypothetical case: Ben, 27, single, employee, rents a flat, owns a bicycle and a laptop, has €6,000 saved. His current policies: phone insurance €9/month, luggage insurance €40/year, legal expenses €200/year. He has no personal liability and no disability insurance. (a) Sort each policy and each missing policy into keep, cancel or add. (b) How much do his phone and luggage policies cost per year? (c) A legal expenses policy offers a €300 deductible instead of €150, saving €25 per year. What is the break-even?

Key takeaways

• Insure losses your savings could not carry; self-insure small ones.
• Health and motor liability are mandatory; personal liability is essential for almost everyone.
• Disability and term life cover matter most when others depend on your income.
• Judge deductibles with the break-even rule and your emergency fund.

Next step

In the next lesson you will see how the German pension system works and how to estimate your own retirement gap.