In most cases, a life insurance policy involves one and the same person being the policyholder, premium payer, and insured party. On death, the policy falls into the estate and may give rise to inheritance tax. The surviving spouse is entitled to a tax-free allowance of €500,000, so that in many cases no inheritance tax arises despite the life insurance. Unmarried couples, however, are only entitled to an allowance of €20,000.
Example: The surviving, unmarried partner is named as the beneficiary of a term life insurance policy (Risikolebensversicherung) with a death benefit of €100,000. No other assets are inherited. €20,000 are free of inheritance tax; €80,000 are subject to inheritance tax at 30%, so the surviving partner must pay €24,000 in inheritance tax.
This can easily be avoided through a cross-ownership arrangement (Überkreuzversicherung): both partners each take out a life insurance policy on which they are themselves the policyholder and premium payer, but the policy is written on the life of the other partner. When the insured event occurs, each partner in effect receives a pay-out on their own policy, and that pay-out is free of inheritance tax.