Endowment life insurance burns your money

5 mn read

“Invest in accumulative life insurance and get a tax refund!”

“Save up for the child’s future and get taxes back!”


Tempting appeals. Last year, residents of Latvia invested almost 92 million euros in end-to-end life insurance (UDA). This is 19% more than the total investments of the 3rd pension pillar. People hope to save up for retirement, for the education of their children, for their future.

Unfortunately, most people who create savings will be disappointed. Insurance companies and their associated commercial banks will leave customers with large losses or zero results. The promised tax refund won’t cover UDA fees, let alone inflation.

Today’s publication is about absurd or even harmful products on the UDA market, about tax refunds as a subsidy to insurance companies and what needs to be done to prevent insurers from “burning” customers’ money.

How accumulative life insurance works.

Simplifying a little, here’s how:

  1. You make contributions to the insurer (eg 100 euros per month).

  2. The premiums are divided into two parts: classic life insurance (often very small) and investment with guaranteed returns or pegged to markets.

  3. When you fill out your income tax return, you will receive a personal income tax refund ( IIN ) every year.

  4. Upon expiration of the policy (no earlier than 10 years later), you get your savings back (plus profit, minus commissions).

The problem arises when the commissions are so huge that they consume not only profits but also most of the tax refunds and your savings received.

Tax refunds are correct in theory.

Like many developed countries, Latvia encourages the creation of savings for the future by offering tax incentives. This is done in order to motivate depositors with a double benefit: income savings + tax refunds.

This goal is not achieved in the insurance market. Insurance companies use IIN refunds to offer customers absurdly expensive products.

Putting aside the classic insurance component, the UDA with a guaranteed yield resembles a term deposit. This is a very simple product, the task of which is to provide a small profit, or at least return the investment in full.

In practice, almost all available contracts inevitably bring significant losses to the client.

A few examples:

  1. Insurer: “CBL Life”

  2. Product: “Guaranteed savings in EUR” “

  3. Losses in a standard situation: 1.5% of the investment over 10 years.

  4. Insurer: “SEB Dzīvības apdrošināšana”

  5. Product: “Accumulated life insurance”

  6. Losses in a standard situation: about 7% accumulated over 10 years.

  7. Insurer: ERGO Life Insurance SE

  8. Product: Life insurance with capital creation to finance education.

  9. Losses in a standard situation: about 10% accumulated over 15 years.

These losses do not arise at all because the client pays for traditional insurance. The cost of traditional insurance in all examples is negligible or even excluded from the calculation.

Moreover, these are by no means exceptional, but the most typical UDA products offered on the Latvian market. The client remains “in the red” and loses a significant part of the IIN return (up to 50% or even more). At the same time, the cost of accumulation is negatively affected by inflation.

Market connection – “We offer the most expensive investment products in the world!”

Classic insurance aside, a market-linked UDA is like an investment fund. Its task is to provide an opportunity to invest in financial markets with similar costs.

In fact, almost all of the available UDAs, tied to financial markets, are absurdly expensive compared to equivalent fund investments. The commission most often goes to an amount that exceeds the IIN refund received.

A few examples:

  1. Insurer: SEB Dzīvības apdrošināšana

  2. Product: Accumulated Life Insurance

  3. Expenses in a standard situation: from 1.9 to 3.7% per annum for 10 years.

  4. Commissions are “burned”: from 52% to 103% of tax refunds.

  5. Insurer: ERGO Life Insurance SE

  6. Product: Dynamic savings – Life insurance with savings in funds, for Luminor Bank AS clients, regular contributions.

  7. Expenses in a standard situation: from 2.7% to 4.5% per year for 15 years.

  8. Commissions are “burned”: from 108% to 192% of tax refunds.

  9. Insurer: Compensa Life Vienna Insurance Group SE

  10. Product: Market-linked life insurance policy

  11. Costs in a standard situation: from 3.8% to 5.7% per annum for 10 years.

  12. Commissions are “burned”: from 96% to 161% of tax refunds.

These costs do not arise because the client pays for traditional insurance. In this case, the costs of traditional insurance are also insignificant or even excluded from the calculation.

These are not exceptional cases, but the most typical UDA products that insurers trade on the Latvian market.

Commissions as high as 5.7% are absurd.

In a global context, this is almost unimaginable. Even at the expensive 2nd pension pillar, before the arrival of INDEX, the average cost in the market was 1.5% per year. And besides, they were the highest in Europe!

With real UDA expenses, the client will almost inevitably be left in the red or with a paltry profit. Commissions will eat up a significant portion of the IIN refund (or even all of that refund). In addition, the cost of accumulation is further reduced by inflation.

IIN Refund is a subsidy to insurers.

Returning the IIN is the only factor that makes the UDA anything attractive. Therefore, when selling UDA, it is always emphasized.

In essence (if not in legal form), insurers receive profits from not only their clients but also from the state budget. The IIN refund essentially becomes a subsidy to insurance companies, allowing them to offer customers unprofitable products and earn on their tax refunds.

The UDA market needs a change.

We have sent a letter to the Ministry of Finance and other competent institutions about the necessary changes in regulations.

There are three of these changes:

You need to enter a commission ceiling for products for which an IIN refund is granted.

IIN refunds cannot be provided for guaranteed profitability products that cause losses to customers.

IIN refund must also be provided for long-term savings in investment funds registered in Latvia.

The first two changes will protect residents of Latvia from absurdly expensive and even harmful products.

The third point will ensure fair and efficient competition in the investment market. If the IIN can be refunded for accumulation in any investment fund, then the costs of UDA agreements with a reference to the market will equal the commissions of investment funds – and clients will have much more choice.

So far, we urge you not to step on a rake.

Don’t invest a cent in endowment life insurance before you know how much you have to pay for this pleasure.

For every UDA product, there is a document called Contributor Essentials, Basic Information Document, or something similar. In this document, you will find a summary of the costs that will normally be covered by your investment.

An INDEXO post is coming soon on how to decide if a UDA is right for you – and how to compare different offerings on the market.

Why INDEXO cares about endowment life insurance?

Our mission is to improve the financial environment in Latvia.

With our appearance on the market of the 2nd pillar pension, modern pension plans with low costs became available to Latvian depositors for the first time. The Seimas is considering the issue of inheritance of the 2nd pension pillar. Society is beginning to realize how important investment costs are.

But the 2nd pillar pension – the state-funded pension scheme – is just the beginning. To ensure a dignified old age, we must create our own savings using private financial instruments. As long as the products available on the market remain incredibly expensive, this cannot be done efficiently.

At the moment, the state supports both the 3rd pension pillar and endowment life insurance with a tax refund. For the future well-being of the inhabitants of Latvia, it is crucial to ensure competition and low costs in these markets.

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