Investors bear risks of poor life insurance returns
Time and again, investors have fallen for “non-binding yield forecasts” of life insurance policies – the broker and advertising material of some companies suggested dream yields of, for example, 12.9% or even 31.2% for British policies in particular. At times, clear warnings that such returns are not indicative of future performance were simply put aside. A very common mistake made in mortgage advice is that of mismatching maturities: for example, the lending rate is fixed for 10 years – while the life insurance policy runs for another 10 years. This can lead to undesirable increases in the cost of credit. Often a life insurance policy or a building society contract is also coupled with a fixed loan, although the permanently high loan interest rates for owner-occupied property are not tax-deductible. In such cases, the banker, broker and the credit institution are then liable to the customer for the loss arising from excessive financing costs. If it is agreed with the bank that a loan is to be repaid by the maturity payment of a life insurance policy, then in principle, in the case of standard banking contracts, the borrower or loan customer alone bears the risk of a shortfall in cover, as the Federal Court of Justice (BGH) has now decided (ruling of 20.11.2007, ref. XI ZR 259/06).
The lawyer then says that the maturity payment of the life insurance policy was agreed “on account of performance” for the loan repayment, which is the rule in banking practice. The customer therefore remains sitting on the remaining debts. Exceptionally, a credit agreement clause can also be interpreted in such a way that the performance “performance instead of” is agreed, as a judgment of the Karlsruhe Higher Regional Court of 04.04.2003 (WM 2003, 2412): Only then does the bank bear the risk of a poor life insurance return because it can only claim the maturity benefit of the life insurance, i.e. it has exceptionally assumed the investment risk of the insurance customer. Also with the immediate annuities and other alleged tax saving models, sample calculations are regularly presented to the customer for the financing of a capital investment. These sample calculations can be highly erroneous, implausible or even clearly or intentionally excessive and serve to keep the customer in the dark about his risks and the costs of financing. In this case, the insurer may also be liable, since the insurer cannot later reduce the profit sharing on the grounds of lower income if the advertising promises were excessive from the beginning. In addition, there are those cases in which the partial external financing of an investment, contrary to the model calculation of the broker, leads to certain losses for the customer: Often only an analysis of contracts and prospectuses provides evidence that neither the customer nor the intermediary had seen the complex interrelationships. In such cases, the bank and/or insurance company may nevertheless be liable for incorrect or incomplete investment or financing advice. Where life insurance policies are advertised as an investment, yield information is also expected.
However, the concept of return on a life insurance policy is generally misleading. If a return is quoted in relation to the maturity payment in the case of scheduled policy implementation, then for the purposes of comparison with other capital investments it must always be based on the full gross premiums, not just on savings portions that the customer cannot even recognize. However, even then the term “yield” is misleading, since in the case of early termination and repurchase often no or even a negative yield is achieved. It is therefore difficult to compare a life insurance policy with an investment, but a return on investment hides the differences and misleads the customer. If he wants to cancel credit and insurance prematurely, this can only be done at a considerable loss – often nothing remains of the mentioned yield. In model calculations, often only an “expected course” is given. Other scenarios with worse outcomes are missing, both on the insurance and the loan side. As a result, the customer is not able to assess the risks that lie in negative deviations from the expected course. Later it turns out that the bad results that actually occurred were not unlikely from the beginning, but that this risk was not made transparent to the customer. If he had known this – he or his lawyer will say – he would never have completed such a construction. An actuarial expert then quickly determined by how much the result – measured against the customer’s assets – would have been better, for example, even with a normal annuity loan. The consequence is then inevitably a liability of the broker and financial advisor for the difference.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
published in Versicherungswirtschaft 10/2008 (page 862)
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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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