What is an Insurance Credit Score
It doesn't help: Even on the third attempt, the financial mathematical calculator shows a considerable minus. The return promises made by life insurance companies before the year 2000 have now been shown to be dissolving. This not only cuts back on many people's pensions, it hits at least as hard thousands of builders who have financed their own home by saving up on life insurance.
The SZ will deal with this problem in a three-part series of articles and provide information on possible counter-strategies.
Reason for the crash
The background to the drop in returns is the crash in stock exchange prices since the summer of 2000 and the subsequent low interest rate phase on the capital markets. This negative return trend for them has prompted the insurers to revise the previously promised amount of the maturity benefit downwards sharply.
For a builder who wants to pay off his building loan with his life insurance after 25 years, there can be a coverage gap of up to 25 percent. For example, suppose you took out life insurance in 1999. At that time, the insurance company offered the policyholder the prospect of an expected payout of 100,000 euros based on a premium return of six percent after 25 years.
If the return decreases after five years, i.e. from 2004, to only five percent, then the payout drops to just 86,600 euros after 20 years. If a return of 4.5 percent is used as a basis from 2004 onwards, the amount paid out is reduced to 80,700 euros. With a return on premiums of only four percent, the payment amount drops even more dramatically to 75,200 euros.
Excess interest rates in the low
As of July 1, 2000, the guaranteed interest rate for all new contracts is 3.25 percent. Since January 1, 2004 this has been reduced again to 2.75 percent. Excess interest is determined annually, but it is only bindingly guaranteed for the following year (declaration period).
The expected maturity payment also includes a final dividend, which is calculated by each company according to its own regulations and may also be reduced. The expected maturity benefit is calculated on the basis of the current excess interest and can lead to low maturity benefits if the excess interest changes. Together with the final dividend, however, this results in a third of the maturity benefit.
Typically, the profit sharing makes up half of the payout. In addition to cost and mortality gains, investment gains are the most important source of excess interest, accounting for around four fifths. Longer-term changes in the investment options of life insurance companies result in adjustments to the interest rates on contracts.
According to the rating agency Assekurata (www.assekurata.de), the current interest rate on the credit balance in 2002 was an average of 6.12 percent. For 2003 it has already fallen to 4.84 percent. After the third reduction in a row, the interest rate is an average of 4.43 percent, which is 0.1 percent lower.
Indicator for the capital market
If interest rates remain low on the capital market, no significantly higher surpluses can be achieved in the medium term. A good yardstick are public bonds, which currently achieve a yield of between 3.6 and 4.4 percent per year with terms of five to ten years.
Bad luck for every fifth person with a contract with a guaranteed interest rate of four percent (concluded between July 1st, 1994 and June 30th, 2000): here the insurers have already started to no longer allocate any surplus participation. It is to be expected that most insurance companies will calculate the current interest rate at 2.0 to 4.5 percent, depending on the product and tariff generation.
How builders react correctly
How should builders who wanted to repay their home loan in full with the expected maturity benefit from life insurance, react to this expected financing gap?
There are many alternative courses of action. The person concerned can later pay the remaining amount from their assets or take out an additional loan in the amount of this financial gap.
Or he negotiates with the bank to include an ongoing repayment or a special repayment. The policyholder can, however, pull the emergency brake and terminate the life insurance policy, especially if the contract is still "young".
Up-to-date information from the insurer is a prerequisite for any decision. With the most detailed catalog of questions possible, the policyholder can obtain the necessary information and submit a future calculation until the end of the life insurance.
The author is a publicly sworn expert for private construction finance.
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