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The Little Shop of Horrors Part II: The Dark Underbelly of the Insurance Industry

von Stefan Heringer

Today, we delve further into what can only be described as the little shop of horrors of the insurance world. We’re discussing once again unit-linked endowment insurance, a supposed "basic investment for the broad population". It's nonsense that, based on our findings, affects almost everyone, from ordinary employees to top managers or entrepreneurs.

Lobbyism prevents a commission ban and real transparency

My partner and me are wondering for a long time how the insurance sector has managed to sell completely dysfunctional products to men and women for decades and get away with it for so long.

The main reason? Aggressive lobbying with almost unlimited financial firepower. This is how the industry prevents sensible, consumer-friendly legislation such as the long overdue ban on commissions, or at least measures to create real transparency.

Almost as concerning however is many people’s reluctance to pick up a calculator for even five minutes and face their own misery.

A fee-based adviser can create transparency for you

To create such transparency, I’ll break down a typical contract, one of our clients, to highlight key areas you should look onto in your own agreements.

Below you will see the result of a unit-linked annuity policy that the policyholder has been paying into diligently for the first six of a total of 36 years.

conditions of the contract I

Initiating in 2015 with €150 monthly, he incremented this by 2% annually, resulting in saving €167.52 monthly by 2021. After six years, he’d channeled approximately €11,350 into the plan over six years. However, the current value stands alarmingly at just €9,558.81 - that is €1,792 LESS than he paid in. Not to mention the return! A miscalculation? Unfortunately not.

Commissions destroy Wealth Creation

The problems start with the selection of active funds. Buzzwords suggesting sustainability or impressive names are often red flags. While they might be marketing wins, the result is rather sobering for the investor: first, there are very high annual costs of a good 2% p.a. and, as expected, a lamentable performance compared to a rational investment in ETFs.

Even the miserable funds in the policy had an overall positive performance from 2015 to 2021. The real pain lies elsewhere, and it is, of course, called front-end loads. To put it in a nutshell, the insurance broker who sold our client the product collected around €3,250 in commission (5% of 36 years x 12 months x €150). This sum will be deducted from the client's savings over the first five years. If you look at the customer's balance after six years, it was no less than 25% of his savings. No rational investment in the world can match that.

Hidden Insurance Costs: Another Blow
Moving forward, is retaining this product viable? The adage goes, "the best is yet to come". But, is it?

Hidden within the fine print are insurance fees, even more elusive than the acquisition commission. Although one can dig through contracts to unearth them, a more straightforward strategy involves critically assessing the insurer's predictions and outcomes.

For illustration, I used an online calculator and the client’s current €9,558 balance to project potential yields over several interest rates (2%, 3%, 4%...). The resultant figures, calculated without fees, were then compared with the insurer's after-fee projections.

conditions of the contract II

Plainly speaking, at a 5.0% yield with further contributions of €167, you'd amass €178,484 in three decades. But the insurer would pay you in this quite optimistic scenario just €131,793 – a staggering €46,691 discrepancy at your expense. At least you can take comfort in the fact that the missing amount is not just gone, it belongs to someone else - your insurance company!

Hands off Unit-Linked Contracts!

If you combine the two effects of the commission and the running costs, assuming a return of 5% over the whole term, an ETF savings plan would generate €211,690, whereas the insurance might muster a mere €131,793. That's a potential shortfall of nearly €80,000! For a deep dive into the insurance industry’s spurious arguments against these findings, refer to my article on the Hartmut-Walz-Finanzblog from September 2022.

Final Thoughts: Unit-linked insurance, especially with active funds in the insurance shell, is one of the least attractive things you can do with your savings in terms of total costs.

Steer clear. Existing contracts should undergo scrutiny by an independent insurance consultant as per § 34 d (2). Currently, we are do not currently have the time resources - except for existing clients - to provide advice on existing life and pension insurance policies.

If you are our client: Bring on the misery, we'll have a look.

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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