Collateralization of a loan with a life insurance policy

The use of a legacy life insurance policy as collateral for a bank loan that is left interest-free to the spouse is not tax-deductible.

The interest from the savings portions of a life insurance policy taken out before 2005 is generally tax-free. However, if the insurance is used to secure a loan, the interest on which is deducted as income-related expenses or business expenses, this may cost the tax exemption. The Federal Fiscal Court has clarified in this regard that the collateralization of a loan with the life insurance policy, the loan amount of which the insurance holder leaves to the spouse without interest, is not a tax-damaging use. Indeed, the interest-free loan to the spouse prevents the tax deduction of the interest paid to the bank.