@German_in_US a foreign life insurance is generally not "qualified" -- not regulated per US laws ( on how they use the premiums to invest ). Thus this would be like an annuity where you pay in an amount per year/month during the collection phase - obviously there are differences. In any case this means that when liquidated, the growth is taxable and because it is foreign , the cash value ( present value ) is reportable under FBAR and FATCA regs.
I don't know when you became a US person ( citizen/GreenCard / Resident for tax purposes) since the FBAR ?FATCA reporting eligibility ( if you met the threshold ) would have started from then.
Since you liquidated the account (and recognized the foreign asset by reporting on FBAR ) in 2021 ( hopefully you have done this since becoming a US person ), the only issue here is whether you should have recognized the gain on the account--- your basis being the sum of all the payments you have made ( converted to US dollars of the day / yearly average ). Yes , you need to recognize and pay the taxes on the gain.
Because this "investment" was not transferable ( i.e. you could not sell this freely ), the gain is not eligible for Capital gain treatment. Thus it is ordinary passive gain , most likely earned interest like a CD. The fact that it is foreign sourced really does not change the tax treatment or character of it ( the earnings/ gains ).
Bottom line, just file an amended return recognizing foreign sourced interest income and since this was not taxed in Deutschland, there is no foreign tax credit involved.
Since FBAR was already filed for the whole value of the account , while resting in Foreign account, there is no violation of FBAR/FATCA rules. The transfer through your foreign bank and to your US bank would have created a SAR ( temporary ) and that's all. So not to worry.
Just recognize the interest earning by filing an amended 2021 return and pay the taxes ( perhaps penalty -- ask for abatement ) and interest. That is all.
Does this make sense ?
