The 10 Commandments

How to avoid capital destruction via life insurance


In economic terms, life insurance policies are often investments that compete with traditional bank products. Intransparency, faulty advice and incorrect billing cost customers billions every year. In most cases, there is then a claim for back payment, reclaim or compensation. However, insurers will not pay without being asked. It is therefore all the more important that brokers – also taking into account their own liability problems – are aware of possible pitfalls and are able to advise their clients professionally and comprehensively right from the start. The customer will thank them for it, because this also gives them the chance to help the customer make unexpected money and thus provide better investments.


1st commandment: No faulty sample calculations

Both German and British insurers advertise sample calculations to customers. However, the specified returns, mostly from the past, repeatedly prove to be incorrect for the future if, for example, outdated mortality tables or even non-comparable products and capital market situations are used. Insurers are liable for the performance of uncertain promises that were represented as certain or where the current already changed circumstances were concealed. Since the 2008 VVG reform, the supervisory authority has repealed its Circular R2/2000 on advertising with sample calculations, so that there are now no longer any binding bases for insurers to do so. As a precaution, these are now being circulated by insurers as merely exemplary for illustrative purposes and without any claim to reality or liability – anyone who, as an intermediary, wants to read more into them can easily find himself liable to the customer.


2nd commandment: no incorrect determination of the customer’s requirements

More than three quarters of all long-term life insurance contracts are terminated before the contractual end, most of them in the first few years. Time and again, subsequent analysis of the advisory situation shows that the client was unwilling or unable to follow through with the long-term savings process. Often there was a lack of sufficient protection against strokes of fate and existential risks. If savings are made for retirement even though nothing has been set aside for emergencies, the loss from the insurance policy is pre-programmed. If illness, unemployment, occupational disability or a liability claim then occurs – or even if only a car repair is pending – the customers inevitably have to cancel their life insurance again – a liability trap for intermediaries.


3rd requirement: No incorrect deduction of acquisition costs and lapse deduction

The Constitutional Court made it clear years ago that endowment life insurance policies serve to accumulate assets. No matter when the customer terminates his contract (prematurely, if necessary): He must always receive a fair share of these assets, namely around half of the (so-called “unzillmerised”) actuarial reserve saved without deduction of acquisition costs – the so-called minimum surrender value – and lapse deductions may also not be made for the contracts in question. However, not a single insurer has voluntarily and without being asked to do so paid its customers the amounts withheld in excess at the time of termination, and some have not done so even after a premium waiver. In addition, some insurers claim that the lapse deduction would be justified as long as only the minimum surrender value is paid. Most of the time the calculation works out – because the customers seldom ask for an expert recalculation.


Bid 4: No erroneous rate surcharges

The Federal Court of Justice had ruled that many insurers were only entitled to a relatively small fraction of the “rate surcharges” they liked to charge for monthly or even quarterly payment, because hardly any insurer had shown the effective interest rate to be quoted in accordance with the Price Indication Ordinance. But then they are only allowed to charge the legal interest rate of 4% and thus a rate surcharge of no more than 1.81% for monthly payments – not the usual 5%. Customers are therefore entitled to a repayment of up to more than 3% of all premiums paid – plus interest. According to case law, incorrect premium invoices do not even lead to the premium becoming due. In the absence of information about the right of cancellation in the case of consumer loans, some contracts – even those that have already been terminated – can still be cancelled and reversed today.


5th requirement: No incorrect splitting into brokerage and insurance contract

Since 2008, under the new Insurance Contract Act, acquisition costs must be spread over five years to ensure that the objective of capital accumulation is adequately met. Some insurers try to get around this by allowing the customer to cancel his life insurance policy after a short period of time, but still have to continue paying the separately agreed brokerage commission. In the end, the customer often still has debts to the insurance company that he has to pay off. This is apparently intended to circumvent the decisions of the Constitutional Court and the legislature. BGH rulings that previously confirmed this possibility may no longer be upheld in the face of these current decisions, because the goal of asset accumulation is missed.


6th requirement: No faulty investment advice by inducing speculation on a credit basis

Some insurers also deny in press releases any knowledge that their large life insurance policies were predominantly financed by banks on a credit basis as leveraged transactions. The incorrectness of such statements is already evident from the fact that insurers confirmed the assignment of the policy to the financing bank. The responsibility of the insurer for such speculative transactions also often results from the advertising printed with the company logo – the intermediary can then often pass on the liability to the insurer.


7th requirement: No incorrect credit financing without indication of total costs

Life insurance is designed to help pay off a loan (e.g., financing a medical practice, real estate, or a commercial business) in one fell swoop when it matures. This type of financing certainly costs the customer “before taxes”, and often enough “after taxes”, much more effort than a classic financing with immediate repayment. The financing via such a fixed loan is often made palatable to customers by the fact that the foreseeable losses are supposed to be offset by high profit participations. What was initially sold like a bargain later turns out to be pure money destruction as surpluses fall.


8th commandment: No faulty pension planning for retirement benefits

Larger contracts in private and company pension schemes are very rarely concluded through bribery of works councils, kick-backs or commission payments. It is much more common for companies to be motivated to promise large pensions without sufficient assets being securely available at the end. Tens of billions for the payment of such promised old-age pensions are missing from the company coffers of small and medium-sized businesses when excessive sample calculations for reinsurance policies prove to be untenable and a GmbH managing director alone is missing half a million or more. The rehabilitation of such models is a challenging task for any intermediary.


9th commandment: No faulty tax planning leads to tax evasion

Part of the essence of life insurance is that the insurer assumes real risks. This is not the case if the insurer does not want to determine how much the annuity will be until tens of years later. Then, by 2010 at the latest, all current income must be taxed year by year like a bank deposit. This also eliminates the privilege of having to pay tax on the half-income procedure or only on a portion of the income from an annuity payment when the insurance matures. Intermediaries should ensure that the insurer improves the contracts in good time.


10th commandment: No betting profit shown as yield

Resourceful distributors promote annuity insurance without death benefit as a yield driver. Before the start of the annuity, the customer does not receive any benefit in the event of death, in particular not the usual repayment of premiums including surpluses without the imputed interest. On the other hand, the lump-sum settlement is astonishingly high, and the “return” is far better than with other life insurance policies or annuities.

But what is sold here as a dream return is largely the betting profit on the customer not dying first. This comes from the capital lost by those who have since died. That this policy is worth as much as a lottery ticket before the draw had to be recognized by customers who wanted to offer it as loan collateral to a bank. In the absence of a death benefit, no surrender value is usually paid out – so it is worthless as collateral for a loan.


Dr. Johannes Fiala and Dipl.-Math.Peter A. Schramm

by courtesy of (published in Expert Report, issue 01/2010, pages 62-63)

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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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