Life insurance: calculation of surrender value

debts life insurance policies
New billing and additional payment

The BGH judgements of 12.10.2005 (Az. IV ZR
162/03, 177/03, 245/03) and the
Constitutional Court with its decision
of 26.07.2005 (file no. 1 BvR 80/95)
massively influence the contracts of the
Life insurers and the
Billing practice for an existing
Life Insurance. The BGH is in the process
in the opinion of the authors, a
frequent fallacy about the calculation
of the surrender value. The
Hope for additional payment should arise with
most life insurance policies cancelled in the early years as a
prove to be unfounded, because the BGH stipulation contradicts the statutory regulations
and therefore unlikely to hold up in constitutional court. On the other hand
already from the legal regulations nevertheless the chance on increased
Surrender Values.

Consumer protection allegations

For many years, insurers’ billing practices have been in the crossfire of criticism,
and this not only because the lobbying of the financial groups in their favor
have pushed through numerous legal facilitations.
Already years ago a judgement was passed (Az. 74 047/83, LG Hamburg) which allowed
“Life insurance for retirement is legal fraud.” to speak out. Those who have their
life insurance policy after only about two years, had to realize that
the surrender value is “zero”. The premiums paid were in particular
Acquisition costs (sales costs incl. broker commission) and a lapse deduction
charged. Factually, the money wasn’t gone – it had just been (kept) by someone else.
The courts apparently didn’t want to leave it at that.

Liability of intermediaries

Experts say that more than half of all life insurance policies were issued before
The agreement may be terminated upon reaching the original term of the agreement. Increase pro rata temporis
the acquisition costs, because the commission remains the same amount.
even if the contract period and thus the payments of the customer at the end much
are lower. The liability of the financial advisor for incorrect advice can be
This may also be the case if the brokerage fee or commission is immorally too high.
Banks and insurance brokers like to combine life insurance at the
Financing with a fixed-rate loan – especially for home construction financing has
this results in considerable economic disadvantages. Finally, the
experience shows that paying off one’s own four walls takes ten years longer and costs more.
more than with an annuity loan: Many a builder-owner has lost
Additional burdens his home in a foreclosure auction. Also these so-called
“Interest rate inflation or leverage transactions” have been a hang-up for years, intermediaries to the

expropriation of the insured

From the protection of property by the Constitution, also from the freedom of action
with protection against unequal bargaining power, the Constitutional Court concluded,
that by the end of 2007 the legislator will have introduced a statutory regulation on the participation of the
Insureds in factually existing, with insurance premiums acquired
assets of the insurer. In practice, insurers can
write off their securities and real estate under commercial law – the insurance customer
is then insufficiently involved in it. The so-called “cross-charges” of the
Insurers are not transparent. Insurance supervision protects the
Insurance customers not sufficiently protected from disadvantage.
Repayment of the lapse deduction to insurance customers
In the opinion of the Federal Court of Justice, clauses concerning the cancellation deduction, i.e.
Termination costs (“penalty fee”), not transparent enough and therefore ineffective.
Consumers could therefore (even in the case of contracts that have long since been terminated) have it checked whether
the insurer still has to pay something in addition.

Repayment of acquisition costs to insurance customers

Acquisition costs are usually distribution costs – depending on the contract and the company,
also depending on whether it is a foreign or domestic insurance, the
Acquisition costs can be 7% or significantly more. These costs were generally offset against the
Premiums from the first two years of the customer’s premium payment are offset.
The BGH has put an end to this practice and, by judicial interpretation of the contract
stipulated that the insurance customer must normally pay at least about just under the
to get back half of his paid-in contributions in the event of cancellation
(Rule of thumb). This means that even in the case of already terminated and
often generate additional substantial losses in the individual case.
Back payments.

15 million contracts affected

The BGH believes that 10 – 15 million contracts could be affected by its rulings.
When the legislator (until the end of 2007) will make a regulation is open – the
Insurance industry now has the task for future contracts “transparent”, i.e. for
to develop clauses that are comprehensible to the consumer from the outset. Thereby
the requirements of the Constitutional Court must also be taken into account.
Check company pension scheme
The labor court Stuttgart (Az. 19 Ca 3152/04) went in its judgement of 17.01.2005
one step further: according to this, employees have the right to a salary conversion
not to accept any burden with acquisition costs at all!
Here the employee is protected even more than the “normal” insurance customer,
because the employee is always entitled to a surrender value calculated from the
Total premiums paid – without deduction of acquisition costs, brokerage commission
etc. This affects employers with deferred compensation models for the

New lawsuits – unresolved problems

Also by the jurisdiction of the higher courts it remains for the consumer as a rule
not spared, the recalculations of the insurers expertly by a
to be examined by an expert. Especially since there is “even more in it” for the consumer than
so far judged, because it is the current value that matters by law.
If the clauses are invalid, the law takes effect – in this case § 176 VVG in the event of termination (and
§ 174 VVG in the case of premium waiver). This states that the surrender value of the current value
of the contract. Deductions (cancellation deductions) may then be made from this fair value.
be made, insofar as these are agreed and reasonable. The BGH now states
finds that these deductions have not been validly agreed.
Whether this is the case remains to be seen. If the BGH bases this solely on the lack of
Transparency of the clause on offsetting acquisition costs by Zillmerisation
this would actually be irrelevant for the agreement of the cancellation deductions,
because the cancellation deductions have nothing whatsoever to do with the zillmerisation of the acquisition costs.
do. Rather, Zillmerization is already required prior to the deduction of the reversal deductions from the
surrender value included in the calculation of the fair value.

Fallacy of the BGH

The BGH apparently assumes – as do most customers, by the way – that the fair value
is derived from the premiums paid after deduction of costs, including acquisition costs.
and taking into account interest and risk contributions. So like the
development of a savings account – this is called a retrospective
However, the Insurance Contract Act (VVG) provides for a current value calculation, and the
The actuarial assumptions are made prospectively, i.e. on the basis of the insurance benefits promised and the
contributions still to be paid. As a simple example, without further cost
excluding acquisition costs and interest – are explained. If the contract stipulates that 20
paid EUR 1000 per year in contributions for years and received EUR 18,000 in the end
because – no matter how non-transparent and whether agreed at all – the first two
annual premiums have been offset against the acquisition costs – then the customer receives after
2 years a surrender value – current value – of 0 EUR, although he paid 2000 EUR.
has. The BGH now believes that this deduction from the 2000 EUR paid is inadmissible because
the deduction of acquisition costs is not agreed transparently.
But this is not the point: according to the law, the surrender value is calculated as follows
namely, time value. And that means: from the agreed performance in the amount of
18,000, the contributions still to be paid for 18 years – also 18,000 EUR
– so that the fair value is EUR 0. These 0 EUR are at the same time
the so-called zillmerized actuarial reserve – EUR 2000 is the zillmerized
Closing costs.
That this result is ultimately due to the offsetting of acquisition costs,
must be determined in accordance with this legally compliant method of determining the surrender value/
The current value, however, must not be explained or otherwise agreed at all. Any
The statement that acquisition costs will be charged would have been purely descriptive.
Character without immediate effect – it is not needed for the result. The
Invalidity of a clause describing this circumstance is therefore completely irrelevant;
the statutory provision alone is sufficient.

Risk of action by the insurers

But what is the current value of a contract? In any case, this also requires a
discount rate to be taken into account. The fair value of, for example, a non-contributory
contract, which provides for a benefit of EUR 100,000 over 20 years, is by no means
at the present time already EUR 100,000. The insurers discount here with the
Actuarial interest rate of the contract, i.e. 4%, 3.5%, 3.25%, 3% depending on the start of the contract
or 2.75%. This means that a non-contributory contract that pays out EUR 100,000 in 20 years has
benefit, a present value of, for example, EUR 45,639 (at an actuarial interest rate of 4 %), or
EUR 58,125 (at 2.75 % actuarial interest).
Whether these sharp differences are justified depends on whether perhaps from
other sources – e.g. through interest on surplus – are still compensated. Because without
each additional surplus is EUR 100,000 paid in 20 years, today
the same value and do not depend on the interest rate at which the insurer
…has done the math. Even in the case of a zero bond that matures in 20 years at EUR 100,000
the current market value does not depend on when the bond (fixed-income security) is to be redeemed.
which interest rate was originally issued, it is rather discounted with
a uniformly determinable capital market interest rate today.

Financial mathematics and court logic

Blatant violations of the laws of reasoning in judgments may preclude decisions before the
Constitutional Court vulnerable, because logic is part of the
constitutional legal order. In particular, consumers with
the current market value according to the fair value model with the help of an expert.
Insurance Contract Act (VVG) and calculate it in advance, in order to be able to
to achieve additional payouts in the event of early termination of the contract.
But if the insurers vis-à-vis the BGH this statutory
calculation method would have been too much in the field, the very question of the
adequate calculation of a fair value emerged. And that would make the clearly
determinable and usually used – but in principle not at all always
the starting point “zillmerised actuarial reserve”, which is clear from the law
would have had to be questioned. However, in view of the current
The capital market situation could be even more disadvantageous if insurers were to take out contracts with
z. e.g. 4 % actuarial interest rate, the surrender value/time value is no longer calculated at 4 %, but at
calculate a capital market interest rate of perhaps soon only 3% or less
would have to.

Control is important

Insofar as one does not trust the insurer to calculate the surrender value correctly and transparently
to have calculated, one can have its calculations done by an independent
by a mathematical expert. This does not initially require
Lawsuit. But the insurance customer must, even in the case of long ago settled or
cancelled contracts, with the insurer a new settlement first of all
if he doesn’t want to give up his good money.



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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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