Brokered life insurance policies must meet the needs and capabilities of the customer

Johannes Fiala, Peter A. Schramm
Endowment life insurance a legal scam?
Already since the judgement of 03.06.1983 (Az. 74 O 47/83) of the regional court Hamburg the evaluation of the capital life insurance as “legal fraud” was judicially blessed. Professor Michael Adams (Univ. Cologne) followed this up in 1997 with his essay “Die Kapitallebensversicherung als Anlegerschädigung”.
Insurance Intermediary Liability
Another five years later, a dissertation proved that even in the case of life insurance as an investment, the intermediary must observe the BOND ruling (Ref. XI ZR 12/93) of the Federal Court of Justice (BGH) on the obligation to advise investors and objects. Since only about one in four long-term life insurance policies was held out to the end by the investor, the suspicion was obvious that investors were being offered unsuitable policies en masse.
Decree of the Federal Supreme Court
This is taken up in substance by the BGH in a more recent decision (judgement of 14.06.2007 (Ref. III ZR 269/06), in which it points out that an insurance broker is obliged to pay damages if he brokers a life insurance policy to a customer which did not “meet his needs and financial capacity”. If the “savings contract” in the form of a life insurance policy runs for only one year, the investor does not even get back two percent of his payments on average, according to a study by Prof. Adams. A negative return of over 98%.
Compensation is rare
While numerous customers with terminated life insurances hope for a new account, with on the average only comparatively minimal additional payments from contract-legal requirements against the insurer, the more weighty requirement lies within the range of the wrong consultation: Investors can require here apart from the paid in contributions also a tidy capital market interest as escaped profit. Still investors have the possibility of demanding the compensation from requirements of the last 30 years: Because after the statute of limitations rules valid since 1.1.2002 brokers are responsible (calculated starting from 1.1.2002) for at the longest still 10 years.
False advice
This does not only include contracts where it was questionable from the outset whether the customer would be able to pay the fixed premiums at all in the long term. Often, a shorter contract term (12 to 15 years instead of 25 to 40 years) would have been less disadvantageous to the customer if terminated early, while the long term would not have been advantageous even if held out to the end. It is not uncommon for insurers to present their customers with non-binding sample calculations showing high returns when taking out a policy – several rulings or notices from the supervisory authority and comments from rating firms show that such forecasts have sometimes shown unrealistically high returns, maturity benefits, lump-sum settlements or pension payments on an incorrect basis. According to some rulings, this can lead to the insurer not being allowed to reduce the surpluses at a later date (claim for performance) or to the contract having to be rescinded with repayment of premiums including interest. In other cases, a false return was given, because it was not based on the paid-in premiums but only on the savings portion after costs and risk premiums; often, for the sake of confusion, it was referred to as “net return”. Annuities were not infrequently sold as yield products, especially when their lump-sum payment was increased in the absence of a death benefit. The fact that the return came partly from the bet on survival and was paid for by the fact that there was no benefit at all in the event of death was then concealed in the advice given. Conversely, policies often contain an unnecessarily high level of risk protection, which further reduces the return. Allegedly, the customer in these cases did not want an investment at all, but a risk hedge. Popular for maximizing commissions and due to the high
The so-called Methuselah policies with premium payment periods up to the age of 85 are also particularly disadvantageous in terms of acquisition costs and risk premiums. In sample calculations, the prospect is then held out that at the age of 60 to 65 the benefit can be disposed of without deductions because the actuarial reserve and surpluses together then reach the sum insured. The risk of diminishing surpluses and the fact that the payout will continue to be postponed into retirement (until over age 75) was usually not explained.
Possible courses of action
In order for the customer to know what type of contract – with costs, risk premiums, surplus model and other actuarial conditions – he has concluded, an actuarial appraisal should first be carried out. This reveals the discrepancies with the customer’s original needs, i.e. the extent to which the advice is not in line with the customer’s needs. At the same time, the loss can be determined actuarially, if not the complete reversal of the contract with repayment of all premiums plus interest is more sensible. This requires an examination by a lawyer because of the question of the statute of limitations and because of the legal prospects of success. A side effect of this check: not so rare errors in the determination of surpluses, maturity benefits, surrender values or earlier contract amendments become apparent.
Address of the authors
Attorney at Law Dr. Johannes Fiala De-la-Paz-Str.37 80639 Munich E-Mail Dipl.-Math. Peter A. Schramm Expert for actuarial mathematics Am Rauschenberg 7 56355 Diethardt E-Mail:
(Small Animal Medicine 3+4.2008, 107)
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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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