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Don't confuse insurances with wealth building

von Stefan Heringer

The urgency for private provision has been growing over the years. It should be evident to all by now that the state pension, at its best, merely offers a basic provision for retirement. To maintain your standard of living to some extent, you need to make additional private provisions.

There are various ways to accomplish this, with homeownership being the most recognized and prevalent. For a long while, life insurance was dubbed the "favorite of the Germans" amongst traditional retirement products. Statistically, every German today has, on average, more than one endowment insurance policy.

Endowment insurance: a zombie product with high commissions

Despite its tarnished reputation in recent years due to disastrous results, high costs and correspondingly devastating judgements by consumer protection agencies, the product, much like a zombie, somehow cannot be killed. Much of this is due to the horrendous commissions that brokers earn from it. Hence, countless financial advisors, bankers, and direct sales representatives are still touring the country, praising a product category that makes no sense at all.

Data from the GDV (the German Insurance Association) reveals that over five million new contracts were signed in 2019, and the total premium volume of almost €100 billion that same year.

So let me be clear:

• Insurance is vital and makes perfect sense to safeguard yourself from financial losses that could threaten your livelihood. It is suitable for this purpose and this purpose only!

• However, for wealth accumulation, insurance is completely unsuitable.

Even the so-called net tariffs, which you can buy from a fee-based advisor, and which allow you to invest in ETFs within an insurance cover, only alleviate this misery. They are just less bad - they are not good.

No matter what type of life insurance policy you have, the pitfalls are everywhere

With a traditional life insurance or annuity policy, it is virtually impossible for a customer to get any return at all. If, as is usual with insurers, 75% or more of the capital is invested in fixed-interest investments, this is mathematically impossible given the high costs and interest rate levels of the last eight to ten years. Under these conditions, it is already a success to preserve the nominal capital over 15 years - not to mention inflation compensation.

Fund-linked and index-linked insurance policies are costly and redundant

Fund-linked contracts are almost worse. Not only do you pay the high fees of the insurance shell, but also the exorbitant costs of the active funds invested. Consequently, most contracts have fixed charges of 3% or higher - annually, spanning the entire duration. The exorbitant sales commission is merely the tip of the iceberg. How is this supposed to add value?

It becomes completely absurd with so-called index policies. The customer is led to believe that he or she is participating in a stock index - without the risks. The calculation logic is so complicated that you need a degree in mathematics to work out the probability of success. Then there are the classics of customer deception, such as using price indices instead of performance indices, which in plain language means that the customer is also cheated out of dividends. Consequently, Stiftung Warentest's unequivocal verdict is: "Unsuitable for retirement provision!

An annuity is often only worthwhile if you surpass a century

It is a mockery if you want to use the policies later to supplement your pension, which is what many people intended when they took them out.

You can ascertain this yourself: The annual notifications and the contracts clearly state how much your monthly pension will be per €10,000. All you need is a calculator: Now divide the €10,000 by the monthly pension, then divide it again by twelve to get the number of years until you see your money again. Now add this to your age at retirement: Oops - no, you haven't miscalculated! In many cases, you will have to live well over 100 years to get your money back in full - without any interest.

If you are wondering whether this is legal and not expropriation - you are welcome to ask the German Insurance Association (GDV) ...

Bottom line:

Don't take out any new endowment policies. If you have existing policies, have them critically reviewed.

Best wishes,

Stefan Heringer
Forty-Nine Fee-Only Advisors

PS: Please feel free to send any questions, criticism or comments to

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