Every day an expert from the t-online advice editorial team answers a reader’s question about money. Today: Is it worth taking out insurance as an investment?
There are many ways to invest your money profitably. With a bad investment, the return achieved may compensate for inflation; in the best case, your assets will increase many times over by the time you retire. There’s only one thing that’s not worth it: insurance as an investment. Here are the most important reasons.
Classic or capital-linked life insurance and similar products currently only offer very low guaranteed interest rates. Since January 2022 it has only been 0.25 percent. For comparison: Secure fixed-term deposits currently offer interest rates of up to 3.25 percent per year.
In addition, the total returns on life insurance policies have fallen sharply in recent years and are often below the inflation limit. Many insured people end up receiving less than what they paid in, criticizes Stiftung Warentest. This is primarily due to the cost structure, which is often not presented transparently to consumers.
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What sounds tempting in advertisements on social media from influencers or in consultations has little to do with reality. Insurance products are associated with high costs, which reduce returns. These include high acquisition fees, ongoing administration costs, fees for guarantees and insurance protection. The costs eat up a large part of the possible returns.
This is what happened with Alewtina and Jakob Zacharias, who have been retired since 2024 and actually relied on a financial cushion from their life insurance. According to a report by Südwestdeutscher Rundfunk (SWR), they took out unit-linked life insurance 30 years ago to protect the family.
Everyone paid in around 9,000 euros each. Then the payout was due. There is around 6,600 euros for Alevtina Zacharias and 6,300 euros for Jakob Zacharias. So overall almost 5,500 euros less than you paid in.
The web of costs and fees begins with the closing and sales costs, too Alpha Cost called. These costs cover, among other things, the commissions for the insurance broker and are usually spread over the first five to seven years of the contract term. Usual commissions for life insurance are between three and five percent of the premium amount.
- Today, insurers are allowed to credit 2.5 percent of the premium amount against the contracts. With an insured sum of 100,000 euros, this corresponds to 2,500 euros. A further 1.5 percent can be added, but is financed from profits and reduces the policyholder’s profit.
- There are also ongoing costs. Administrative costs, also known as Beta Costs Fees, referred to as fees, arise when managing and investing the capital. Ten years ago, the average administrative expense ratio for all insurers was 2.25 percent. This rate varies depending on the insurer.
- Gamma Costs or investment costs are deducted from the contract credit and depend on the investment volume. For example, 0.5 percent is due for every 100 euros of contract credit per year.
- There are also unit costs, so-called Kappa costsi.e. fixed fees that are charged once a year per contract, regardless of the contribution amount. These will be offset against the deposits. These costs are particularly significant for contracts with low premiums. For example, if the Kappa costs are 80 euros per year and the monthly contributions are 25 euros, after deducting the unit costs, only 220 euros instead of 300 euros are left for capital formation.
- With unit-linked life insurance, the insurance also has to be included ongoing Fees to the fund company where your money is invested. For passive exchange-traded index funds (ETFs), these are around 0.5 percent per year and for equity funds between 1.5 and 2.5 percent per year.
- After all, the insurers charge themselves Risk premiumsin order to protect the insurance, for example against non-payment or early termination.
- Depending on the type of insurance, a During the year surcharge occur, i.e. if the payment is made monthly instead of annually. The background is a finesse of the insurers who say that the premium is an annual premium. Anyone who wants to pay monthly – and that’s usually most customers – has to pay a surcharge. This surcharge of around four percent is deducted from the deposits.
- Contribution-related fees are between one and three percent per deposit. Fees may also apply for special events such as contract changes. Contractually agreed dynamic increases also cost extra. Dynamic contract changes are considered new contracts and are subject to commission.
All of this means that the surrender value of the policy is very low or non-existent for the first ten to fifteen years.
Insurance products often have long terms and are inflexible. Your money is tied up for the long term. You have no option, for example, to withdraw part of your money in emergencies or to change the amount of contributions. Early terminations lead to high losses. Changes to the investment strategy are hardly possible.
There are more attractive alternatives for long-term investments, whether for retirement planning, buying a property or other larger purchases. ETF savings plans offer significantly higher return opportunities at lower costs. Direct investments in stocks or funds are more flexible and the costs are more transparent. Ultimately, the return that comes from an alternative investment far beats that of insurance.
Contracts where the insurer fails to generate a positive return even after 30 years are a slap in the face to consumers. “If the same money as the Alewtina family and Jakob Zacharias in the example mentioned at the beginning had been invested elsewhere with a similar risk, the capital would have doubled to 18,000 to 19,000 euros,” says Niels Nauhausers from the Baden-Württemberg consumer center.
In most cases, it is not advisable to take out insurance as a pure investment. The combination of low returns, high costs and lack of flexibility makes them unattractive.
