Why the guaranteed minimum interest rate for insurance companies says little about profitability
"But with at least a guaranteed minimum interest rate of 3,5 percent for my capital life insurance - I am still there after deducting the inflation rate, am I not?" Long-term insurance holders may bring this objection. In fact, there is the so-called guaranteed minimum interest rate, which is often also referred to as the guaranteed interest rate or maximum discount rate, for classic capital life and pension insurance. It is an interest rate that the insurer is legally required to set as a lower limit.
With the policyholder's money invested, the policyholder must earn at least this guaranteed minimum interest - less is not allowed. How high this guaranteed minimum interest rate depends on the time the insurance is taken out. In the past few years it has decreased continuously. Newly signed contracts currently bring only deplorable 0,9 percent per year. But at least 2000 insurance contracts concluded until June with guaranteed interest rates between 3 and 4 percent. In the case of older policies, this interest rate continues to apply until the due date.
Allow for the cost
Up to 4 percent interest for an older policy, and without any risk of loss! You'd think that's pretty attractive. There is only one catch: not all of your paid-up interest accrues on the guaranteed interest. But only the so-called savings portion of your premiums. First, the insurer deducts two items from each premium: on the one hand, there are the costs for survivor protection in the event of death and, on the other hand, the sales and administration costs.
How much the deduction for survivor protection and distribution as well as administrative fees is, is a well-kept secret of the insurers. So there is a big guesswork, what is left as a savings portion of the premiums. Somewhere between 75 and 95 percent, this value should lie for most policies. In plain language, this means that only 100 to 75 euros of 95 euros that you deposit are invested - and only for this money is the maximum discount rate guaranteed. This reduces even the prescribed excellent interest rate of 4 percent, which an insurer must offer for contracts between July 1994 and June 2000, to 3 to 3,8 percent. While this is no longer so rosy, at the end of the day, if you have an inflation rate within the target corridor of the European Central Bank (2 to 3 percent), you will not suffer any losses. However, if you have only concluded your contract from 2013, you will inevitably end up in the loss zone.
So you see: With capital-forming insurance contracts, no state can be made when it comes to investing. A new degree is not recommended at all. And older contracts should at least be put to the test.
What return can be achieved
So we come to the question of yield. The Bonn economist Moritz Schularick has carried out a large study to examine the most important capital investments for 16 industrial nations over a period of 150 years. During the analysis period, there were all types of crises that you experienced imagine can: big and small wars, debts, bank and real estate crises, the great global economic crisis, inflation and deflation phases, the Cold War, oil price crises, acts of terrorism, accidents and numerous natural disasters.
The capital markets were put to the test several times in these 150 years. Therefore, the average returns that were achieved after 150 years are not a "fair weather event", but a realistic value in turbulent times.
The only right measure: the real return
It would be wrong to just look at the interest earned when investing. You always have to consider this interest rate together with the ongoing and mostly unnoticed loss of purchasing power of the invested money. An investment is only viable if the return achieved, i.e. the interest that an investment brings in, remains positive after deducting the current inflation rate. This is exactly what Schularick did in his investigation.
The results look like this: In the past 150 years, the interest investments so loved by German savers in real terms, ie after deducting inflation, generated 1 percent returns per year. In fact, wealth growth cannot be achieved in this way, since taxes and fees also have to be deducted. It looks a little better with bonds. This type of investment generated around 2,5 percent profit per year in the observation period. That is better, but it is still not enough to achieve a noticeable increase in wealth.
Shares vs. real estate
Anyone who wanted to move into a higher league with investments in the past 150 years could not avoid real estate and stocks. Shares brought real 7 percent returns per year, residential real estate even 8 percent. Residential real estate is therefore the winner with a short lead over shares, but for many savers, real estate is not suitable as an investment. On the one hand, the purchase requires a great deal of capital - 10 000 euros are far from enough - on the other hand, real estate cannot usually be bought and sold at short notice at reasonable conditions. Anyone who buys a property decides for several years or decades. You should also consider the relatively high transaction costs when buying property.
These two weaknesses do not have stocks. On the contrary: 10 000 euros are definitely sufficient to buy shares and / or active and passive equity funds. In addition, you can buy and sell equity investments every trading day. We recommend a holding period of five, ten or even more years for equity investments so that your strengths can develop to their full potential, but if you need money suddenly and at short notice in an emergency, selling through your custodian does not take longer than three minutes you can also get out at the current market price - i.e. on fair terms. As you can see from the studies and figures presented, dynamic wealth accumulation is not possible without shares.
Are equity investments safe enough?
Now we come to the second question you are probably asking yourself: Are equity investments safe enough? The answer in a nutshell: The stock market can fluctuate greatly in the short term, in the long term the stock market always strives upwards. It also depends on the investment horizon and therefore the time in which the money can work for you.
Schularick's study clearly shows that the 7 percent returns mentioned above were not achieved evenly each year. On the contrary: double-digit price fluctuations over the year are no exception. If you have sleepless nights when a share position is briefly 30 percent in the minus, you should rely on other forms of investment. In this case, mixed funds are a good compromise between return and security.
On the other hand, if you invest money in shares in the long term, you can sleep well. Because all studies show: In the long term, share prices will rise. Of course, this does not apply to every single share, but to the stock market, which you can cover easily and inexpensively, for example, with a suitable index fund.
How it is with the security of an equity investment: The Renite triangle of the DAI
The significance of the return triangle, published by the German Equity Institute (DAI), is particularly impressive when it comes to the security of shares. For 50 years, it calculated the income retrospectively that accrued from a DAX investment year after year. Even if the German stock index DAX has only been around since 1988, it has assumed a fictitious composition and weighting according to the current DAX rules for the years before. The vertical axis represents the year of purchase, the horizontal axis the year of sale.
The yield triangle shows you, among other things, when you would have reached the profit zone with a purchase in the past at the latest with a DAX investment (the DAX is the most important German stock index). The result in short form: The number in the box in question then indicates the annual average return in percent that an investor has achieved with his DAX investment during the relevant holding period.
In the period of the past 50 years, it was extremely unlikely that a pure DAX investment, i.e. a share purchase with exactly the same composition and weighting in the DAX, would still be in the red after five years. The probability was even less after ten years. In the worst case, a DAX investment only came out of the red after eleven years. But these periods already describe the most unfavorable entry phases that were theoretically possible over 50 years. In practice, even after a stock market storm, you will be in the profit zone significantly earlier.
What have the last 50 years been like?
First of all, look at the step-like, white lines running from the bottom left to the top right, which mark a holding period of five years, ten years, 15 years, 20 years and so on. Already the five-year line shows you: In the period of the past 50 years, it was highly unlikely that a pure DAX investment would still be in the red after five years. The probability was even less after ten years. In the worst case, a DAX investment only came out of the red after eleven years. In the vast majority of cases, however, after 15 years between + 2,3 and + 15,4 percent per year, an investment in the German stock barometer DAX brought a positive return. This was on average
- after 20 years between + 6,0 and + 15,2 percent per year,
- after 30 years between + 6,9 and + 10,9 percent per year.
Mind you, this is a DAX investment with no entry optimization and no diversification on securities other than DAX shares, which can also reduce losses. The result should convince even the greatest skeptics: a stock market investment is not wrong, provided you take enough time for a solid and sustainable performance.
- After ten years, purchasing power will only be as much as 4085,36 euros today.
- After 20 years, the purchasing power is only as much as 3338,04 euros today.
- After 30 years, purchasing power has almost halved with 2727,42 euros.
Of course, it may be advisable to temporarily accept such inflation-related losses for part of your money in order to remain liquid and to avoid having to finance unexpected major expenses through - possibly loss-making - shares or fund sales. But the majority of your investments should remain positive even after deducting the inflation rate. By the way, the Federal Statistical Office published the latest inflation rate every month. Officially, it is called the »consumer price index« - this takes into account the composition and weighting of goods and services that are common in the average German household.
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