Life insurance policies for the repayment of construction loans
The combination of several financial products (e.g. building loan and life insurance, real estate loan and building society contract) promises the investor additional income through possible interest rate differences or tax savings, and at the same time additional commission for the agent. However, it is not uncommon that the money saved in a second contract (e.g. life insurance for loan repayment) is ultimately not sufficient to pay off the debt completely. Then the question arises of the responsibility of credit institutions, insurance companies and their advisors or intermediaries?
Banks and consultants are liable for excessive costs due to combination with fixed credit
As a rule, it is cheaper for the customer to repay from the beginning – this is what the specialist then calls annuity loans. The contractual partners (e.g. bank, insurance company, intermediary) are liable for the unnecessary additional costs of advice on the combination of additional products of suspension of repayment with the fixed loan. For banks, these combination models are a fine thing, because the customer pays higher fixed interest rates over the entire term – unlike with an annuity loan. At the same time, product providers of redemption suspension products often offer banks more favourable refinancing conditions for the loans in question. Practice shows that the combination alone with a so-called redemption vehicle (life insurance, building society savings contract, investment fund, etc.) can extend the usual term for the total redemption from 15 years to about 25 years – with the same total monthly charge to the customer – if the income of the redemption suspension product is not significantly higher than the required lending rates. As a result, banks and their advisors become liable for the advice they provide: they must compensate the customer for the unnecessary additional expense later.
Banks and insurers are liable for so-called underfunding of the repayment vehicle
Regularly, it takes years before the customer realises that his building loan, which is to be repaid by means of life insurance policies, cannot be redeemed in full from the insurance benefit. This may be due to falling share prices or overly optimistic forecasts about the “value increase” of life insurance policies. Experts estimate the volume of combination loans affected at around EUR 100 billion, with new business in this combination segment amounting to around EUR 6 billion annually. Repeatedly, insurers have been ordered to pay damages for “incorrect non-binding forecast calculations”. In addition, insurers must also be liable for “embellished promises and reassurance pills about alleged repayment security” in the context of performance liability: This is because insurers are liable for inaccuracies in the content and meaning of the insurance conditions, even if the false information was provided by a bank employee or other intermediary. But banks can also be liable for a shortfall if the maturity payment of the life insurance policy is not sufficient to repay the loan. Today, total interest rates for life insurance policies of less than 4 % to approx. 4.5 % are common, but until the beginning of this millennium, advertising was still at 7.5 % and more.
Until well into the 1990s, even experts – and the correspondingly trained sales force – “did not even consider it theoretically possible” that life insurers’ investment income and total returns could fall below 7 – 8%. The forecasts on the amount of the maturity benefit that were widespread at the time have often been cut back to half in recent years. In practice, this means that only half of the loan can be repaid on expiry or that repayment will be around twice as expensive. Anyone who had trusted that, for example, 6.5% interest on loans could be offset by 8% interest on life insurance now notices how the model pays off with only 4% interest on life insurance – and even this only on the savings portion. An exit is usually not possible or at least associated with high costs, because in the case of the often deposited refinancing of the bank by the life insurance company, the insurer’s investments and the bank’s loans are in each case in cover pools which are dependent on the fixed term. Neither the bank nor the life insurance company will therefore agree to any change.
Cancellation and surrender of the life insurance policy with simultaneous repayment of the loan thus prove impossible, or at least very expensive due to cancellation deductions of the life insurance policy and early repayment fees charged by the bank. In this way, the “speculation” of the borrower and policyholder against the insurer and bank, which is also referred to as “speculation”, is prevented.
consistent. The mere indication of a “yield” on a life insurance policy regularly constitutes a reason for liability, as the supervisory authority also considers pure yield information to be misleading in the case of life insurance policies. A further reason for liability, also at the expense of intermediaries, insurance brokers and consultants, is the obligation to provide advice tailored to the customer’s needs: the insurance contract – including the duration of premium payment – must meet the customer’s requirements. For this reason alone, more than one in two insurance contracts may have been brokered with the “wrong product” from the outset. Banks and advisors are liable for misleading returns, even in the case of fund financing. A typical customer deception follows from the fact that in the case of closed-end investments (e.g. real estate funds) a high IRR yield (so-called internal rate of return) is stated in the prospectus. This also affects many of the film fund investments that have become worthless in recent months. The investor then believes that he can finance his investment with a lower loan interest rate: If a financial expert calculates this, it is often a “certain loss” for the customer from the outset. Banks, consultants and independent agents are liable for misleading returns on internal rates of return.
Insurance companies, financial services providers and consultants are liable for faulty software calculations
In 2007, a jury of experts awarded a prize for the old-age provision advice – in the process, the experts discovered that around 96% of all current software products in the hands of consultants calculate incorrectly. The chance of being correctly advised in a software analysis tends to be practically “towards zero”. Not only insurance companies and banks are “pilloried” here, but also so-called financial sales companies/pools: For miscalculating software, especially the use of “provision calculators” by cooperating agents and consultants, these market participants are liable to the wrongly advised customer. An unrepresentative survey of key players in the insurance industry led to the assumption that no insurer has its software (including Internet applications) professionally tested by external consultants or auditors? It is difficult to explain otherwise that about every third Riester contract offers the customer a “zero-command zero” pension increase in old age: This is because the benefits are credited to the so-called basic security pension, i.e. they are simply deducted when the pension begins.
Liability for incorrect credit and life insurance settlements
Insurance companies must pay the customer at least about half of the unzillmerized actuarial reserve in all cases affected1) , and in addition they may not make any cancellation deduction made in the process: A surrender value of “zero” in the first few years is therefore not permissible – but no insurer would think of paying this money to the customer without being asked to do so. Apparently, insurers prefer to wait until the presumed 3 billion euros in customer claims have expired: The damage to their image and the mistrust of their customers is likely to be much more expensive in the medium term. Even in the case of unit-linked life insurance policies, insurers owe their customers a re-invoicing and subsequent payment in the corresponding amount2 , all other conditions being equal. The underpayment to the customer must therefore be compensated.
Failure to adjust conditions
Banks must also adjust their customers’ interest rates in their favour when variable interest rates are agreed or when the conditions are adjusted at the end of a fixed interest period, and in the event of market fluctuations of 0.20% of the average interest rate according to the monthly report of the Deutsche Bundesbank3 . The compound interest effect can result in considerable differences for the customer: As a rule, no statute of limitations can be assumed before knowledge of an expert recalculation. The additional burden on the customer must therefore be compensated for.
Liability of banks and insurers for credit-financed “immediate annuity
The beautiful dream of secure profit, without investment risk, and immediate receipt of a tax-free pension is offered to the customer not only through financed real estate investments, but also through a combination of life insurance against a single premium and a loan to finance this premium (leveraged deal): Not only bank advisors but also the credit institutions behind them are surprised when a customer who has been put in distress by losses goes to court and the bank has to compensate for the loss. Independent investment advisors and financial sales organisations are also regularly liable, as customers are not fully informed about the numerous risks. Financial product distributors like to claim during training sessions “We have checked the investment model in our specialist department”, which is another reason for liability.
However, customer advisors at credit institutions are also happy to receive reassuring training: Apparently, reference is made to alleged experts in the company, who, for example, later claim to have examined media fund models as “tax fraudulent” or “prosecuted by the public prosecutor”. Every tax apprentice learns that it is hardly possible “as a co-entrepreneur” or investor “to get 120% loss allocation, for example, if only 20% is invested – the rest of the investment money for initiator guarantees is parked in fixed deposit accounts”. While bank advisors are told by their superiors “what is to be sold to the customer again this week”, free agents only have it easier in this respect – but they are rarely up to the task of questioning the “economic, fiscal and legal plausibility” required by case law after their training.
In the case of leverage, insurance companies, and often their agents (even if they are credit institutions) are also liable for insufficient risk information about an investment in the form of a leveraged pension insurance. The exit from uneconomical financing with investment for repayment begins with the realization that only an independent expert examination makes the magnitude of the loss transparent for the customer: Bitter is the fact that the loss increases literally daily. In addition, we also advise on how tax risks can be limited during the restructuring process. Only a few credit institutions know of the option of potentially saving the customer’s taxes completely – and thus massively reducing the damage on balance – despite the cancellation of an insurance contract that is harmful to tax. Typical is the late insight of the customer that the “seller” did not inform him about the central risks (risk of interest rate changes, risk of maturity mismatch, uncertain expiration date for “Methuselah policies”, currency risk in the case of foreign currency financing, risk of subsequent collateralization or underfunding, lack of or incorrect – possibly even too high – risk protection regarding unemployment, disability and death, high cost burden).
An analysis of contract terms and clauses reveals that numerous BGH rulings4) have judged the self-created financial services contract law to be invalid – but without any effective reaction from the financial sector. This may also provide a starting point for reversing the contracts. Practice shows that only the cooperation of experts and lawyers creates the best possible basis for the reorganisation of faulty financing.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.kohlhammer.de (published in “Der Gemeindehaushalt” 07/2008, (pages 160-162)
www.kommunalverlag.de (published in Kommunalwirtschaft special issue/2011, pages 94-96)
www.tabakzeitung.de (published in DTZ 3/2008, page 8 under the heading: The liability situation for real estate loans and equity financing with life insurance )
published in trade journal DE, 12/2011, pages 74-76
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About the author
PhD, MBA, MM
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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