– Why the days of effortless money-making via life insurance are long gone –
Agents’ commissions fall
The Life Insurance Reform Act (LVRG) not only lowers the guaranteed interest rate for life insurance policies from 1.75% to only 1.25% from 2015, but also the permitted inclusion of acquisition costs through zillmerisation from 4% to 2.5% of the scheduled premium sum by the end of the contract. On the one hand, this is intended to reduce the guarantee payments of the insurance contracts.
and thus more secure, on the other hand, the reduction of commissions to intermediaries is to be influenced in order to make life insurance policies a little more attractive again for the
insured persons. The first intermediaries have already received supplements from insurers reducing commissions from 2015.
Since then, insurance intermediaries and insurance brokers have been in a frenzy, because in future commissions are to be paid less once and more over the entire term of the policy.
paid on a staggered basis, with liability in the event of termination of the contract until the end.
Growing prospects of negative returns in life insurance
On 05.06.2014, the European Central Bank (ECB) had lowered the key interest rates to 0.15%, and on 04.09.2014 to only 0.05% – the interest rate for deposits at the ECB has even been in negative territory at 0.2 percentage points since then. The ECB was unable to bring about an easing of lending to households and companies, but at best an increase in profits for the credit institutions via an increasing credit margin.
Since the introduction of the ECU in 1998, capital market interest rates have been falling, with the result that for years policyholders have in many cases not even received back the sum of the premiums paid when the life insurance policy is terminated or expires. From 2015, Riester pensions will often no longer be offered to insured persons over the age of 50, because many insurers are no longer in a position to guarantee at least the paid-in contributions at the start of the pension at 65 – at 2% %.With inflation itself, this represents a real loss of around 15% %.
At the same time, insurance companies go to great lengths to generate higher returns through “innovative” financial products, not infrequently following the motto “If everything you know doesn’t work, let’s try something else that we don’t know yet”. For example, investments are made in private equity, including offshore, commercial real estate loans, including securitised, and emerging market bonds. Scoffers compare this to the chance, with falling church tax revenue and not much interest in buying indulgences, to try offering seminars to CFOs and CIOs for prayer courses to increase returns – with a flyer advertising “Even Jesus wasn’t poor and had an asset manager” or “Wealth doesn’t disgrace”.
ECB zero interest rate boosts government debt
The ECB’s low interest rate policy encourages investment in foreign government bonds, which could yield up to more than 4% if the bet goes that at least certain capital investors would not have to fear a credit default because of continued safe “rescue packages”. To this day, banks and insurance companies do not have to hold the corresponding risk capital when betting on government bonds, which is popularly described as “privatising the profits and socialising the losses”. Life insurance customers are seldom aware that the assets built up by their premium payments to the insurer can be reduced again at any time, for example to avoid insolvency of the insurance company. The legislator is countering this growing risk by no longer allowing the insurance customer to participate in the price gains of the fixed-interest securities in the investment assets in future – with a maturity benefit of EUR 100,000, up to more than EUR 5,000 has thus been cancelled very quickly.
Real estate as an alternative?
Only apparent bargains are to be found where once flourishing landscapes were expected, instead of the repeated floods of the century of the last decade. Unemployment and demographic change depending on the landscape, but also precarious work and growing old-age poverty are leading to falling prices for buying and renting. Nevertheless, the tangible investment on a credit basis can contribute to the exchange of future income today from future monetary value to future tangible value. This would provide some hedge against inflation, but not without transaction costs.
Alternative investments for savers?
A classic question to the bank(st)er is “How do I get a small fortune with your advice?” – and the correct answer in many cases should be “By coming to me with as large a fortune as possible.” At present it is foreseeable that the necessary savings for a funded old-age pension will have more than doubled, because what is lacking in interest and compound interest on the capital, the pension saver must put aside from his own income according to the savings stocking method, in order to receive the same pension later.
In Greece and Spain, for example, the average savings rate has been tending towards zero for years among an increasing proportion of the population. Among the poorest, the economic crisis and unemployment are changing consumer behaviour, promoting recycling, exchange networks, gardening and neighbourhood help, concentration on local products and energy-saving projects.
In this country, too, there have been corresponding investment opportunities for decades, for example in the case of solar plants on own or municipal buildings, and precisely not with dubious wind farm initiators. As an alternative to miscalculated open real estate funds, which are now in liquidation, there are thousands of cooperatives nationwide as operators of, for example, credit institutions, breweries and housing associations. Even if one could observe there up to more than 4% profit sharing before and after the financial crisis, the selection and observation of these investments is neither effortless nor free of charge in the consultation. Sometimes dubious investments are offered, especially through intermediaries, for example with a built-in obligation to make additional contributions or questionable future prospects.
Private financing and annuities as an alternative
The low yields of private pension insurance policies are also helping to increase the popularity of offers from SMEs for private company financing, which are clearly more profitable. Here, the middle class or building owners even offer lifelong life annuities including survivors’ benefits and inflation adjustment. These pay off much better – especially for men, because there are no gender-uniform pension levels prescribed here, which have further lowered insurers’ pensions as required by the EU since 2013.
Some charitable or commercial foundations also have this in their program – and thus it is also suitable for financing municipal projects through suitable design. With the assurance that, in the event of premature death, unused annuities will at least be used for an intended good cause – and not increase an insurer’s profits. Although these annuities are only taxable at the low rate of return, the charitable foundation can even issue a tax-deductible donation certificate for part of the payment – if you want, your own name or that of other loved ones can also be immortalized. Instead of a license as an insurance broker or as a financial advisor, for example, a business registration as a fundraiser for foundations is sufficient, little more than for standing in the pedestrian zone with a collection box for the local animal welfare association.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
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About the author
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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