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– What insurance customers should be aware of before or after they terminate –
Countless brokers and advisors live from new business. So there is nothing more obvious than to persuade customers to cancel or sell their existing investments, especially life insurance policies. However, general statements about pension (RV) and life insurance (LV) policies may mislead the customer. Rather, an actuary would have to perform precise calculations beforehand. Just as an actuary can also quantify the damage after the decision to sell on the secondary market or after a termination, for which the agent is liable in the absence of clarification.
Calculation of serious policy buyers
Respectable policy buyers are simply satisfied with the prospect of a return of about 3% on their policies, as is customary today. The buyers can refinance around 90% of the current surrender value (RKW) at a short-term interest rate of 0.8% p.a. and thus earn (3% return minus 90% at 0.8% interest =) 2.28% on the 10% equity capital These 22.8% return on equity, or after costs perhaps 15% to 18% as return on capital, are hardly subject to risks, because if interest rates rise or surpluses fall, the increased surrender value can always be demanded and the loans repaid. Insurance customers who can do without termination or sale should have the alternatives recalculated, because the investment of the proceeds received usually brings in significantly less – especially after taxes – than the life insurance itself until maturity.
Risky offers from policy purchasers: payment by instalments and collection business
A popular model is the purchase of policies for a purchase price that is to be paid off over perhaps more than 10 years. Unfortunately, this is not permitted by law if the buyer does not have a corresponding “banking license”. Such contracts are null and void. The buyers first get problems with the bank supervision, the public prosecutor’s office, the insolvency administrator and of course also with the policy sellers.
Another variant is the customer’s profit-sharing in the later proceeds, either at or after termination. Some debt collectors and experts promise to get money out of it afterwards. As a rule, the buyer of policies or receivables does not have a collection permit under the Legal Services Act, so that this type of contract is also ineffective.
And finally, there are customers who hope that someone will check faulty invoices and make additional claims, let’s say for a fee of around 100 Euros. The situation is disappointing when it turns out that nobody is working on the file and everything becomes time-barred, because such service providers do not regularly enter into an obligation to carry out further work.
Selling on the secondary market is often the worse decision
Many insurance customers find that their LV has so far brought them only losses or hardly any return. Soon they believe that it will continue like this. The consequence is: termination and repurchase or sale on the secondary market, which often pays more than the repurchase value at termination.
But why can the secondary market achieve a better return where the customer cannot? Quite simply, the secondary market cannot do it, because the customer could also usually achieve a good return if he/she continued to use the product, even more than the secondary market. However, he does not know this, because he would first have to have it recalculated – if he cannot do it himself, by an actuarial expert, which the secondary market does have. If the customer were to know the true yield from today until maturity – and how this can be further optimised by means of contract changes made regularly in the secondary endowment policy market immediately after purchase – many policies in the secondary endowment policy market would not be sold, but would continue to be held until the end or until a point in time when later termination would be more worthwhile than continuation. This date can be determined actuarially.
Today is the first day of the rest of the life of the insurance policy
The important thing is that the customer has to forget what losses the past has brought him until today. These are borne and are often based on initially high costs and risk premiums of the policy, cancellation deductions in the event of surrender and greatly reduced terminal bonuses in the event of early termination. From then on, without looking back into the past, it is only necessary to calculate into the future – this leads to surprisingly high returns. Anyone who in two hours in the queue for the Cezanne exhibition has already moved 5 metres to the cash desk will not go home because of the 2 hours of time wasted without result, but because of the fact that now only 5 metres to the entrance, another quarter of an hour will be needed. That it might have been better not to queue at all two hours ago is a now pointless consideration when this option was missed two hours ago.
Increasing returns through contract design
The result can be increased even further by trimming the policy to yield. For example, by switching to annual payment, excluding supplementary insurance, shortening the term, making additional payments or even waiving contributions at the right time or waiving further dynamic increases, the return can again increase considerably, but it can also have the opposite effect if one is unfamiliar with the actuarial effects even on the surpluses, by which “perseverance” is often rewarded. Without an expert assessment by an actuary for the specific case, the customer will regularly be left in the dark.
However, maximising returns is not everything. If the continuation subject to contributions up to the end in relation to the waiver of the payment of the surrender value and the continued payment of contributions yields a return of 4%, but the exemption from contributions yields as much as 4.3%, this need not necessarily be the better solution. This is because the contributions that continue to be paid can often still generate tax-free returns of 3.8%, for example, which would be waived if the contributions were exempt. Instead of the saved premiums, therefore, up to less than 1 % less Withholding tax on the overnight deposit account, it is better to continue paying it into the policy – the buyer in the secondary market would also act in this way.
Ignorance by rating agencies?
It is sheer nonsense when a daily newspaper quotes a rating agency as an “insurance tip” in the following sense: With annual payment, the insurer would calculate the premiums as invested earlier than with monthly payment. The insurer simply converts them to annual payments and then treats them in the same way. As with instalment surcharges, you can therefore simply determine the effective interest rate for monthly payments.
The fact that the return on the dynamic adjustment is possibly lower than that of the current contract because of additional one-off costs does not mean that it is not so high that it makes sense, especially if it is tax-free. In addition to current interest, there is also an effect from final surpluses, which can more than compensate for the costs. Moreover, there are no one-off costs at all in net policies. And the running costs are also lower on the dynamic part than on the existing insurance, because noncontributory unit costs are also included there, but not in the dynamic part. This is not simply a new contract, but often a more favourable calculation. This is often the case when declaring surpluses, e.g. also cost surpluses. Here too, general statements are misleading – an actuary has to calculate it precisely.
Asset management and risk diversification
Anyone who is the sole owner of a life insurance policy could consider risk diversification, for example to achieve a conservative return of up to more than 4%. Following the example of the “Hippo Happy Halodria” bank (name changed), it will in future increasingly be possible for government bonds in Europe to be declared subordinate or redemption-free by a stroke of the pen from finance ministers or governments. Nevertheless, the future currency risk can already be transformed into a tangible asset today without selling or terminating the life insurance policy. Some ongoing effort will be involved, especially since there are money and capital investments that come with the usual administrative costs, but also without commissions and almost no marketing effort.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.kmi-verlag.de (published in kapital-markt intern, supplement to no. xx/19)
www.network-karriere.com (published in issue 09/2019, page 30, under the heading: No yield tuning by selling life insurance policies on the secondary market?)
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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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