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Retirement provision: Why life insurance only pays off with a four percent return


Life insurance is one of the common financial products in Germany - but the contracts often yield little. Now the financial regulator has taken a closer look. You should too.

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Elderly couple: The products would have to “provide a reasonable probability of an after-cost return in excess of a reasonable long-term inflation expectation”

Photo: Sebastian Gollnow / dpa

The financial regulator BaFin recently took a closer look at life insurers.

She has announced how she intends to supervise companies in the future.

In short: insurers who are very expensive for endowment insurance and annuity insurance and pay high commissions to their intermediaries must expect more supervision.

Even if many customers give notice to a company prematurely, the supervisors want to take a closer look.

It is astonishing how high the annual costs for life insurers still are, even after years of criticism.

Many customers should also look around for alternatives for existing contracts.

Yield should be above inflation

I would not have believed the initial hypothesis of the financial supervisory authority: The Bafin answers the question of when a capital-forming life and pension insurance with regular contributions can have an appropriate customer benefit: The products should “with sufficient probability achieve a return after costs that exceeds a justified long-term inflation expectation" - and that means for the Bafin over two percent.

Inflation rates of between five and ten percent were not even mentioned at this point.

At the same time, Bafin determined that the effective costs in 2021 averaged 1.64 percent annually, and a quarter of insurers billed costs of 2.35 percent or more.

For a number of products, the costs were even more than four percent – ​​per year.

Even a good return of five percent is no longer enough to make such a contract worthwhile in view of inflation.

And even with low costs, long-term life insurance only comes close to the performance of a simple ETF portfolio if you assume an optimistic return of eight percent.

From Bafin's point of view, the situation for customers is even more difficult because a significant number of them may have planned to pay into life insurance for 30 years, but are unable to do so.

In the case of fund-supported insurance policies, the average annual cancellation rate (storage in technical jargon) was 3.7 percent, even in the excellent stock market years from 2015 to 2020.

Of 100 customers who have started to save, less than a third are left over after 30 years.

The rest dropped out before then.

And that has a catastrophic effect on the return on such a pension scheme.

The authority calculates that anyone who resigned in the first five years would have made a significant loss because of the high acquisition and sales costs.

In the best case – if the investors in the insurance group have done a good job and have generated a return of eight percent – ​​“only” a loss of 3.5 percent a year.

In the worst case even eleven percent minus.

That's how rough the costs hit the office.

No ban, but more control when things are going particularly badly

However, the Bafin does not want to ban such endowment life insurance products.

She also does not want to prohibit the high commissions per se.

In the draft of its leaflet, it only announces that insurers with particularly high costs will be examined more often and more intensively as part of "risk-based supervision".

Control according to risk profile, other authorities do that too.

Farmers, for example, are checked much more frequently by official veterinarians if they use a particularly large number of antibiotics per animal in the barn.

Thirteen associations and companies have commented on the plans of the financial regulator in the past few weeks.

As is to be expected, they are too strict for the German Insurance Association (GDV) and far too lax for the Federal Association of Consumer Organizations (VZBV).

The arguments put forward by the stakeholders are certainly interesting.

In principle, the GDV finds the risk-based control okay, but checking one or five percent of the insurers more frequently is also enough.

It doesn't have to be 25 percent.

In addition, one should not see the lack of benefits of life insurance because of the lack of returns so strictly.

An expected return above the rate of inflation cannot be the sole decisive factor for taking out life insurance.

An "absolute requirement to beat inflation on average would mean that no products could be designed for [poor customers]".

Above all, Riester and Rürup contracts could not be controlled solely with such an investment goal.

Wait - slow again.

So that means: poorer people with low savings rates have actually only been adding to life and pension insurance for years and cannot increase their money in this way.

It is essential for them in particular to have meaningful and cost-effective savings contracts.

But the insurance industry cannot or apparently does not want to bring such products onto the market.

A sign of poverty.

The industry association even understands the lack of a ban on commissions in the Bafin draft as a commitment by the supervisory authority to commission sales.

The VZBV, on the other hand, thinks that the entire commission system should be abolished.

It makes the contracts unnecessarily expensive and deprives customers of returns, even though the investors are doing a decent job with the insurers.

"Only a general ban on commissions can sufficiently improve the quality of financial products and the quality of financial advice," according to the consumer advocates.

Commission systems no longer exist in the Netherlands or Great Britain.

What this means for your life insurance

You don't have to wait for the next steps of the financial regulator, you can do something directly:

  • Look at the annual status report that you have received from your insurer for several years.

    If the costs of your insurance are particularly high compared to the industry and the contract has not been in place for that long (less than ten years), do not wait for the Bafin.

    End the contract with horror instead of continuing the horror indefinitely.

    Always assume that your contract must yield at least a 2 percent return after costs to beat inflation.

    In order to save for retirement, you have to think about something else before the end of the insurance contract, for example a cheap ETF portfolio.

  • If your contract expires in the next five years, grit your teeth and persevere.

    However, you should not increase the regular payments, because this will result in new commissions for insurance sales, which will further reduce the return on your contract.

  • If you find it difficult or impossible to make the regular payments for your contract, but the contract is about to expire, then make the contract non-contributory.

  • If you need money urgently, you have the option of either withdrawing a sum from the contract balance or borrowing your own money from the contract.

    This can sometimes even be cheaper than an installment loan.

  • If all else fails, consider resigning.

Normally, you should not conclude new contracts solely as an investment.

It only looks different if your boss pays a lot more as part of a company pension scheme – at least 25 percent.

Or if the state (or the taxpayers) strongly subsidize your personal contract as part of a Riester pension.

Of course, the Bafin supervisor would have to take a particularly close look at these contracts and at least sort out the most expensive cashiers completely.

It is unacceptable that the old-age provisions of millions of citizens often remain inadequate due to the high costs of the insurance industry.

And we, as taxpayers, also subsidize those who cause these high costs with the watering can.

Source: spiegel

All business articles on 2023-01-28

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