Act to ensure stable and fair benefits for life insurance policyholders (LVRG)

– Why life insurance works collectively –


The new law to ensure stable and fair benefits for life insurance policyholders (Life Insurance Reform Act – LVRG) leads to noticeable benefit cuts for insurance customers and is intended to strengthen the risk-bearing capacity of insurers. Life insurers already had up to one and a half dozen options for reducing benefits – at the expense of the assets accumulated by the insurance customer at the insurer.

Life insurance is not an individual investment

Life insurance policyholders and those who want to become one should take note that life insurance works collectively. The contributions belong to him until they are paid, and thereafter to the collective with the insurer.

What collective means needs to be made clear – it would be nice if the life insureds also developed a collective consciousness. Z. For example, Lenin developed one among the peasants, taking away their supplies and distributing them to the workers in Moscow and the soldiers.

Some did not understand that nothing is taken away from them in a collective, because nothing belongs to them, and thought that they could withhold something from the collective. However, the collective consciousness has been enriched by shooting those without collective consciousness.

Cancellation of the valuation reserves serves to restructure the collective

Reductions in benefits, such as the legal entitlement to a share in the price gains of annuity securities, which no longer exists as a result of the LVRG, only lead to a redistribution in the collective with regard to future claims of policyholders, because those who had not terminated their contracts by the time the LVRG came into force, or whose contracts expired before then, did not yet have a valuable claim to valuation reserves which they could have lost.

It would be a misconception to think that the legislature is taking anything away from a life insured. Because you don’t take away something that would belong to you. The Finance Committee says so very clearly:

“It was clear from the public consultation that it was not the case that anything would be taken away from policyholders by the measures in the Bill,” he said. Rather, life insurance is a collective matter and it is a matter of protecting that collective. It also has something to do with solidarity, he said.”

Insurance sales often without clarification of the collective idea

The collective consciousness among the life insured will improve by itself if those who do not like solidarity in the collective either do not take out life insurance or cancel it. But one can also promote the collective idea and strengthen the collective consciousness. After all, it has its advantages when no one owns anything and everyone owns everything together.

However, the insurance sales force is often unaware that inadequately informed customers later demand reversal or terminate the policy. If today already up to more than three out of four long-term life insurance policies are terminated prematurely, the industry gets an unnecessarily bad reputation if this is based on faulty advice about the alleged quasi-individual investment in a life or pension insurance policy. After all, the real strength of life insurance also lies in the fact that the capital is invested collectively and across generations – these advantages can certainly be communicated to an average customer.

Low interest rate phase and future tax liability not caused by life insurers

The low-interest phase is expected to last for decades – it began with the announcement of the introduction of the euro. It has been observed for years that at the time of termination and sometimes even at the regular expiry of the contract, the premium payments were increasingly higher than the benefits paid by the life insurer. The apparent ease for the customer comes at a price, in that each insurer incurs highly variable acquisition, risk and administration costs. In the future, the payout of life insurance after a sale upon occurrence of the insured event will also no longer be tax-free.

In the event of termination, a cancellation deduction is regularly made, as an explicit compensation, because the terminator harms the remaining collective and is supposed to indemnify it through the cancellation deduction. This has been prohibited by the BGH for many contracts – but most actuaries agree on this: these are “judgments against the collective”.

If the premium payments are higher than the payout, a comparison with other funded forms of investment helps to assess the increase in value. There, you can realise losses and bear this risk yourself – in life insurance, however, you receive guarantees, even if these are only on the premiums paid in.

In return, however, one should not expect to participate fully in value increases – here, too, there is an equalisation in the collective investment over generations and decades.

To the extent that real interest rates are affected by perhaps only perceived inflation or deflation, this is not within the control of life insurers. It is, however, the responsibility of the intermediary to provide information on open and hidden costs, and the LVRG now requires him to document this information.

If you want to get the most out of your life insurance, you have to know that you are speculating against the collective. This cannot be encouraged by the insurer – it is not for nothing that life insurers therefore maintain a certain lack of transparency. With the help of actuarial experts, one can hope to optimise one’s own advantage at the expense of the collective – but it is always preferable to realise that solidarity is the right way to behave in a collective.

by Dr. Johannes Fiala and Peter A. Schramm

by courtesy of (accessed December 2014)

and (Issue 9, September 2014)

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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