Life insurance policies are often part of the insolvency estate
When reinsurance and direct insurance can be gone
The Federal Labour Court (Bundesarbeitsgericht, BAG, judgment of 17.01.2012, Case No. 3 AZR 10/10) recently ruled that an insolvency administrator may access life insurance policies for the company pension scheme even if the employment contract states, for example: “The life insurance policy … is and remains the property of Mr E. K.”. The employee or managing director Ernst Korn (name changed) believed that this clear formulation sufficiently secured him in the event of insolvency. A momentous miscarriage of justice.
Evidence of agreements with the insurance company. What is agreed in the employment contract with the employer initially has no effect on the question of whether the insolvency administrator can directly access the assets accumulated in the life insurance policy or not. The BAG decided that the agreements with the insurance company were the only decisive factor. If these agreements are not clear or cannot be proven, managers and other employees will later have to file their claims in the insolvency table or may receive – if at all – only partial compensation from the Pension Protection Association.
Incorrect or missing granting of a subscription right or pledge
The effectiveness of assignments, pledges and the granting of a subscription right depends, in accordance with insurance contract law and the General Life Insurance Conditions (ALB), on such legal arrangements being notified in writing and being received there. An e-mail – often also fax – is not sufficient. In practice, occasionally such evidence can still be found with the accountant. After years, even some insurance companies have trouble confirming that written notice was given. The safest way would be for the future beneficiaries to have the insurer confirm in writing, on a copy, when the notification was received by the insurer.
Almost every life insurance policy does not deliver what it was supposed to in economic terms
Employees, board members and managing directors sometimes literally fall off their chairs when they look at the surrender values of their life insurance policies for company pension schemes in the light of day. Almost every occupational pension life insurance policy was initially calculated with optimistic sample calculations and then brokered. A more detailed analysis shows that the capital market interest rates, which have been low for years, are usually far from sufficient to enable life insurers to pay the maturity benefits projected on the basis of interest rates once hoped for. If one then also nets out inflation or increases in the cost of living as well as the levies due on disbursement, the result is almost certainly a negative real return. This is all the more insufficient for the old-age provision dreamed of at the time, because life expectancy has risen in the meantime and the capital paid out not only has to last longer, but also yields far lower interest during retirement than originally assumed.
Old age poverty, funding out or reversal?
Those who want to hold on to their occupational pension will not be able to avoid comparing the employer’s promise in the text of the commitment of the employment contract with the guaranteed benefits of the life insurer. As a rule, only a fraction of this will be sufficiently and properly insured compared to the content of the commitment. In this case, further occupational pension reserves would have to be formed so that employees would not only have a fraction of the collateral effective under the insurance contract in the event of the employer’s insolvency.
It would be a mistake to believe that even a lump sum equal to the amount to be paid out at the start of the annuity
The Board of Management is of the opinion that the tax-deductible pension provision formed is sufficient from an economic point of view to actually finance the promised old-age pensions and, if applicable, surviving dependants’ pensions. A lump-sum settlement thus regularly turns out to be a serious loss for the employee compared to insisting on the provision of the promised pensions. It is also dangerous for the pension beneficiary if he allows the employer to erode the value of the lien on the capital generated from the reinsurance by having it consumed by the employer primarily or even only proportionally at the same time as the pensions paid, so that it is thus less and less sufficient as security for future pensions.
On the other hand, the usual sample calculations used to illustrate a hoped-for effortless growth in the life insurer’s assets often also provide grounds for reversal. This may be due, for example, to the fact that the calculations were based on falsified mortality tables or unrealistically high interest rates. In many cases, intermediaries are also responsible for this, because they had glossed over the prospects and had completely pushed the merely model-like non-binding nature of such fictitious calculations into the background. In addition, however, it is also the insurance companies themselves which are legally obliged to provide advice if there is a permanent and recognisable cause of underfunding. Otherwise, many do not realise until the start of their pension that they are often missing more than half of the capital realistically required to finance their pension.
About the person
Dipl.-Math. Peter A. Schramm is an expert for actuarial mathematics (Diet- hardt), actuary DAV, publicly appointed and sworn by the IHK Frankfurt am Main for actuarial mathematics in private health insurance (www.pkv-gutachter.de).
Dr. Johannes Fiala is a lawyer (Munich), MBA Financial Services (Univ.), MM (Univ.), certified financial and investment advisor (A.F.A.), lecturer in civil and insurance law (Univ.) and banker (www.fiala.de).
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About the author
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. »More about Dr. Johannes Fiala
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