The majority of long-term life insurance policies are terminated before the scheduled end of the contract for a variety of reasons. Buyers of such “used” life insurance policies may use different business models, most of which are legal. However, the Federal Supervisory Office for Financial Services (BaFin) has banned some business models.
First of all, life insurance policies are long-term contracts for which the intermediary must first determine whether the customer can really afford to pay the insurance premiums, often over decades. If the intermediary does not check the customer’s needs or the customer’s ability to pay, he is liable for investment losses (BGH judgement of 04.06.2007, Az.III ZR 269/06).
Liability of insurers and intermediaries
The majority of long-term life insurance policies are terminated before the scheduled end of the contract. However, the customers have undertaken to pay acquisition costs of up to more than six percent of the sum insured. In addition to the ongoing administrative costs, these costs are then offset by the insurer against the premiums for the first five years and in some cases even longer. The Federal Constitutional Court (decisions of 26.07.2005, Ref. 1 BvR 782/94 and 957/96) ordered insurers to give customers an appropriate share of the assets created with their premiums at the insurer, so that customers are to be reimbursed around half of the money paid in as a minimum surrender value. Not only occasionally, insurers have also calculated dubious rate surcharges by not indicating an effective interest rate. From this, but also from the combination with a credit financing or doorstep selling situation, the consumer may still have a right of withdrawal decades later.
Business models of the buyers
Typically, the seller of a life insurance policy has a sudden financial need, such as due to serious illness, sudden occupational disability, need for long-term care or unemployment. Such strokes of fate then lead to the question as to why the intermediary did not secure this as a matter of priority – he may therefore be liable for the loss.
Often the buyer offers the seller a purchase price that is higher than the surrender value. If the life insurance policy is pledged to a bank, this liquidation is a loan restructuring measure. This can be particularly lucrative if the buyer is located abroad and, according to the rules of international tax law, the deduction of capital gains tax is avoided.
Other buyers specialise in claiming “additional premiums” from the insurer, for example for illegally assessed instalment surcharges or for underpayment of the surrender value after a buy-out. In these cases, the client often still pays fees, and later hopes to get a fair share if the buyer has been successful. Not infrequently, however, such purchasers seem merely to allow the claims bought up for a fee to lapse, with the exception of a few promotional sample cases.
Business model of re-covering
A popular way for customers to generate fresh liquidity is to terminate their existing life insurance policies and then invest the money elsewhere, for example in funds or precious metals. Sometimes trustees are also used, so that the customer is not informed of the payment of the surrender value until later – together with a statement of additional or unnecessary fees for the trustee. It can happen that the agreement with the trustee is void from the outset, for example because there is a conflict of interests or because the trustee does not have the necessary permission.
Illegal business model: buying up against payment in instalments
Some companies offer customers the option of receiving the purchase price in installments, either interest-bearing or interest-free. Customers are promised a higher purchase price or even a fabulously high interest rate. Whether the buyer will become insolvent prematurely, and the customer will end up receiving only a portion of the promised purchase price installments, is then up in the air.
In addition, such purchasers would have to obtain a licence to conduct deposit-taking business pursuant to section 1 para. 1a sentence 2 no. 1 of the German Banking Act (Kreditwesengesetz – KWG), provided that the customer’s claim to repayment has not been securitised by means of bearer or negotiable debt securities.
In such a case, affected customers can refer to the fact that the buyer has also carried out banking transactions without the corresponding permission, i.e. a so-called unlawful act according to § 823 II BGB is present, so that the complete contract bundle can be null and void from the beginning (BGH of 11.07.2006, Az. VI ZR 341/04), and reversal has to take place.
By Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
http://www.schlossallee-schwaben.de (Issue 06/2013, November-December 2013)
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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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