high costs - low interest

Whole life insurance in Germany

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First things first

An endowment life insurance policy offers protection against death on the one hand and on the other hand you save for your old age.

Due to low interest rates, this type of insurance is no longer recommended today. Term life insurance can be taken out as death cover. There are many better options for old-age provision.

However, old contracts can still be really good. If you already have a whole life insurance policy, don't cancel it in a hurry, but rather consider selling it.

Whole Life Insurance

Patrick Ott
Patrick Oliver Ott
Expert for insurance and finance
2. April 2022
2022: Guaranteed interest rate reduced to 0.25% 

What is a whole life insurance and who needs it?

In a nutshell: no one needs whole life insurance in 2022. We advise against taking out new policies. Why do we say that? 

Traditional life insurance always includes death cover - so the family gets money if the insured dies before maturity. At the same time, the insurance is also intended to provide for old age. The aim is to save money that can be paid out in retirement as an annuity or as a lump sum. The combination of the two objectives (death benefit and savings plan) in a life insurance policy brings the two decisive disadvantages. 

First, having a separate term life insurance policy for death benefit gives you much more flexibility. Secondly, there is no interest on the total premium paid in, but only on the savings portion after deduction of the premium for the death benefit.

Development of the guaranteed interest rate in endowment insurance

Twenty years ago, the guaranteed interest rate of a traditional life insurance policy was still over 3.5%. For policies taken out from 2022 onwards, the legislator has reduced the maximum guaranteed interest rate to 0.25%. The following chart shows the ever increasing reduction in the guaranteed interest rate:
Guaranteed interest rate for whole life insurance in 2022
The guaranteed interest rate used to be a selling point for endowment life insurance. When the contract was concluded, the policyholder could be sure that at least this interest rate could be expected until the end of the contract. However, the current low-interest environment means that insurance companies can no longer generate sufficient profits to guarantee a higher guaranteed interest rate. For this reason, the legislator has regularly lowered it.

The insurance industry has been calling for the rate to be lowered again to 0.25% since as early as 2019, because this reduces the guaranteed pensions that insurers have to promise their customers at the end of the contract term. At the same time, the low interest rate makes life insurance unattractive as a model for accumulating capital for retirement. There are numerous other ways to provide for retirement that promise significantly better returns.

High costs and interest only on partial amount of insurance premium

The acquisition costs for endowment life insurance policies are not low. In addition, many contracts have high annual administrative costs. Depending on the insurance company, these are between 1% and 10% per year. 10% is certainly the exception. According to a recent study by Franke und Bornberg, the average administrative costs for a life insurance policy are 2.0% per year.

Another disadvantage of the combination of death benefit and savings component is the fact that the guaranteed interest rate only applies to the savings contribution. The portion of the insurance premium that is allocated to the death benefit does not receive any interest.

The high costs and the interest on only a portion of the total premium significantly reduce the effective interest rate. With the guarantee of 0.9% interest, some insurers achieved an effective interest rate of 0.2%. Other companies even had to report a negative return on premiums. This means that these contracts do not even guarantee to pay back the capital paid in.

Profit participation in life insurance

The guaranteed interest rate determines what the life insurer must pay out to its customers as a minimum. However, the return on the overall contract also consists of a second part: the profit participation.

The insurance company gives each insured person a share in the ongoing profits generated by the insurance company's investments. Guaranteed interest and surplus participation together make up the current interest on the savings portion.

The profit participation is not a guarantee. For example, the company can pay only the guaranteed interest rate for one year and no surplus participation. In addition, insurance companies are making less and less profit due to the low interest rate environment. 

Accordingly, the current interest rate has been declining for years. For 2019, a total return of 3.0% on average could still be achieved for a life insurance policy. Compared to other investments, this is a very low return.
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