Investment Expert: Life Insurance Better Than Its Reputation
Life insurance has been struggling with a bad image for years: high costs and hardly any income mean that many life insurance policies are prematurely shut down or canceled. But investment expert Wolfgang Staudinger is convinced that this form of investment is better than its reputation. At fynup.at, the investment advisor offers a comparison calculator for types of investment, making costs transparent. He has been working on tests with the Chamber of Labor and the VKI for years.
“If you are given a motorway vignette for your new assessment, it will almost certainly be the most expensive vignette of your life,” says Staudinger in a YouTube video for his website. For years he has been fighting against the commission-driven sales structures in Austria, which often mean that life insurance is worthwhile for the insurance company and its agents, but not for the customer.
“Financial advice in Austria is apparently free, there is a coffee and you are wooed, there are gifts and everything is great. The customer is made to believe: ‘Cool, everything costs nothing'”, Staudinger describes in an interview with the APA the problem. Many people are not aware of what it actually costs to take out life insurance. The most important tip is to try to understand the offer yourself and have it checked independently, says Staudinger.
What makes life insurance expensive are above all the high acquisition costs. The commission for the consultant is paid via the monthly premiums and this is usually 5 percent, but can also amount to 6 or 7 percent of the premium amount. In the case of a contract in which 100 euros are paid monthly for 35 years, that is up to 3,000 euros that the consultant receives when the insurance is taken out.
It is particularly bitter from the customer’s point of view if these acquisition costs are due at the beginning of the term because they reduce the compound interest effect and ensure that the insurance is in the red for many years. Such insurance contracts, where all acquisition costs are offset from the sum of all planned payments in the first five years, are called gezillmert in the insurance industry. These contracts should definitely be avoided, advises Staudinger. Untrimmed policies, where the agent’s commission is divided over the entire term, are better, and commission-free net policies are even better, where the insurance premium and the consultant’s fee are to be paid separately.
“At fynup, we charge a monthly rate of at least EUR 300 for arranging a savings plan or a net policy,” says Staudinger, explaining his business model. It’s not really a good deal for him yet, but “we want to be a bit of a game changer and you have to invest something at the beginning.” It is only through a lot of automation and a large number of customers that the sale of net policies begins to pay off. Basic advice is provided online through articles and videos. Staudinger then bills for a subsequent individual consultation on an hourly basis, as does the support during the contract period, depending on the need. Compared to the commission model, fee advice is fairer and more transparent to the customer, says Staudinger.
With the currently prevailing sales model, it could happen to you, according to Staudinger, that you are offered a contract for 35 years, even if you want a shorter term. This is because the advisor can maximize the commission. This is calculated from the annual premium multiplied by the term, up to a maximum of 35 years. The initially high acquisition costs mean that the insurance is in the red for 14 years even with an annual return of 7 percent, Staudinger calculated. Classic life insurance policies with an expected return of 2 percent often did not even cover inflation losses until the end of the term.
According to Staudinger, securities accounts are significantly more transparent in terms of costs compared to life insurances, but they have a clear tax disadvantage compared to unit-linked life insurances. In the custody account, you pay a capital gains tax of 27.5 percent annually on the profits, with life insurance, however, the income is tax-free, instead you pay 4 percent insurance tax on the deposit if the term is longer than ten years. Calculations by fynup with historical price data show that the profit from one and the same fund can only be doubled after 45 years through optimized costs and optimized taxes.
“The basic formula is: the longer the term and the higher the expected return, the more speaks for the fund police,” explains Staudinger. “Unfortunately, the practice is exactly the opposite: We see mostly mixed funds in the fund police, that is, conservative investments with lower expected returns and the typical stock saver is with the custody account.” With an assumed annual return of 7 percent and a monthly deposit of 150 euros, the difference between the custody account and the fund policy after 30 years is almost 31,000 euros.
“Sometimes it amazes me how much time and energy the entire financial industry and private investors spend finding the best fund, the best ETF, the best strategy, while at the same time ignoring the possibilities of the fund police, mostly because they even ignore them don’t know, “says Staudinger.
In summary, it can be said that taxes are lower on life insurance, provided you make a profit. The tax advantage of the fund policy increases with the term and the amount of the return. Since life insurances tend to be more expensive in terms of costs than, for example, online securities accounts, part of the tax advantage is negated. A comparison of all costs and their effects on performance, shown in a curve, provides information on when and at what rate of return the fund police beat the custody account. With a term of less than five or ten years, you usually go better with the depot, over 15 years the fund policy usually wins.
Incidentally, with the fund police, with skilful drafting of contracts and good advice, any inheritance can also be well regulated, especially with blended families and the rich. “With wealthy clients that is often more of an issue than tax,” said Staudinger. Another important topic is the so-called enjoyment phase after the deposits in the savings phase. If you only have the required part of the saved capital paid out monthly in the pension, you ensure that the rest of the money continues to be invested tax-free, explains Staudinger.
Back to the tax advantage: In contrast to the fund policy, this does not apply to traditional and conservative life insurances because the return is too low, also due to the current interest rate environment, according to Staudinger. A trend reversal is also not in sight, on the contrary: In mid-2022, the guaranteed interest rate in Austria will drop from 0.5 to 0.0 percent. Nevertheless, classic life insurance continues to make up the lion’s share of the insurance industry. In 2020 there were 4.8 billion euros in life insurance in Austria, of which only 780 million euros were in fund policies.
Staudinger is convinced that classic life insurance nowadays does not pay more or even less than a savings account with 0.0 percent interest, and that people notice that and are correspondingly angry, is the reason why the life insurance product is in crisis. “We once put that into a formula and that means: capital guarantee times zillmerization equals double loss.” In the current interest rate environment, classic life insurance cannot be recommended with a clear conscience. So why is almost every second newly concluded life insurance policy a classic? “First, the commission for the intermediary and, second, the ignorance of the consumer.” The commission model only went well as long as there was high interest and the costs were not noticed or were not so significant. Staudinger quotes the American investor legend Warren Buffet: “When the tide comes down, you can see who has swum naked.”
The problems have been known in the industry for a long time. In an interview, the management board of an insurance company recently admitted that a life insurance contract with them – despite terms of 30 or 35 years – ends on average after eight years, i.e. is bought back. That is also not good for insurance companies in the long run, said Staudinger. “In my opinion, we are at the beginning of a transformation towards fee consulting.” The EU securities regulator ESMA has been pushing in this direction for a long time, resistance came mainly from Germany and Austria, but the new traffic light coalition in Germany is now examining a commission ban for financial products.
Staudinger refers to studies that show that in countries with commission bans such as Sweden, consumers are better advised and the products are of higher quality. That there is a need for action in the industry is also shown by the trend that many young, educated adults acquire financial knowledge themselves, for example with the books by Gerd Kommer, and then rely on online custody accounts with index funds (ETFs) and ignore life insurance. “That is the niche in the market that we want to close with our tool,” said Staudinger. In the comparison calculator from fynup, all funds available in Austria are stored and linked to the respective financial products and their costs. The database contains more than 50,000 combinations. fynup was founded six years ago as a software start-up; in addition to the three founders, there is an investor on board.