Whole Life Insurance Dynamic Old Contract: Optimising Opportunities and Pitfalls
13 Apr 2025
11
Minutes
Katrin Straub
CEO at nextsure
Do you own an older endowment life insurance policy with a dynamic option? These contracts can be valuable but also contain cost traps. Learn how to review and optimise your old contract.
The topic in brief and concise terms
Older contracts for endowment life insurance with a dynamic feature can offer high guaranteed interest rates, but each increase in dynamics can incur new costs.
You can generally object to the dynamics; check your contract terms to see how often this is possible before the right expires.
A precise analysis of the costs and benefits of the dynamics is crucial to optimize the return on your old contract.
Dynamics in Old Contracts: What You Should Know
A whole life insurance policy with built-in premium increases in an older contract means that your premium, and therefore the guaranteed insurance sum, increases annually by an agreed percentage. The aim is to protect your policy's value against inflation. For contracts concluded before, say, the year 2000, the guaranteed interest rate might still be at four percent. Therefore, carefully check the terms that apply to your specific older contract. The premium increase can help adjust the insurance cover in line with rising living costs. However, this adjustment is not always without additional costs, as we will see later.
Cost Trap Dynamics: Identifying Hidden Fees
Although the dynamics should increase the value of your endowment policy, caution is advised. With each dynamic increase, new initial charges and commissions may arise, as if a new small contract were being concluded. These costs are often deducted from your contributions over the first five years of each increase. This means that you may end up paying new costs throughout the entire term. Our expert tip: Request a detailed breakdown of the cost structure of your dynamic increases from your insurer. This way, you can understand how much of your contribution increase actually goes into the savings portion. The consumer advice centre recommends checking whether maintaining a dynamisation is beneficial for well-earning older contracts, but also considering the option to pause or stop it. The decision greatly depends on your individual situation.
Guaranteed interest rate in old contracts: A valuable anchor?
Old contracts, especially those from the 1990s, often feature a guaranteed interest rate of, for example, 3.25 percent or even four percent. However, this guaranteed interest rate only applies to the savings portion of your contributions, which is the amount after deduction of risk, administration, and acquisition costs. The exact amount of the savings portion is not always transparent. It is important to know that the agreed guaranteed interest rate applies for the entire duration of your old contract and remains unaffected by later reductions in the maximum actuarial interest rate. For new contracts, the guaranteed interest rate has been just 0.25 percent since 2022. This underscores the potential value of older policies. Making a term-free contribution to a life insurance policy could be an option, but should be carefully considered.
Options for Action: Adjust or Stop Dynamics?
You are not helplessly subjected to the dynamics. Generally, you have the right to object to any annual increase. The specific conditions, such as how often you may object before the right to dynamics expires (often after two or three consecutive objections), can be found in your insurance policy terms. It may be wise to stop the dynamics if the costs outweigh the benefits or if your financial needs are already met. Consider the following steps:
Check the amount of the annual cost for the dynamic increase.
Compare the guaranteed benefit increase with the additional costs.
Assess your current and future insurance needs.
Research the tax implications of a change.
Consider suspending the dynamics if you wish to be temporarily relieved financially.
Find out if it is possible to reduce the dynamic percentage, often down to a minimum of three percent.
A change to old insurance policies should always be approached with caution. Weigh up whether the advantages of a lower premium burden outweigh the potentially lower maturity benefits.
Expert Depth: Legal Aspects and Current Judgments
The calculation of final costs in dynamic increases is a complex field. Each increase is often treated like a new contract, meaning that commissions can again be deducted from the additional contribution. Legally, for example, 2.5 percent of the premium amount may be set as closing costs and distributed over the first five years. With an annual dynamics of ten percent on an initial contribution of 100 euros, significant commission payments can accumulate over the years. In the past, there have been repeated discussions and also judgments on life insurance, dealing with the transparency and appropriateness of costs. Our expert tip: If you have any uncertainties regarding the costs or the performance of your policy, independent advice, for instance from consumer centers, can be valuable. They can also check whether an objection to the contract due to faulty instructions is applicable. Pay attention to the tax treatment of earnings from endowment life insurance policies concluded after 31 December 2004; earnings are generally taxable here, although under certain conditions (term at least twelve years, payout after the age of 62) a fifty percent tax exemption may apply.
Return optimization: Strategies for your existing contract
To optimise the yield on your endowment life insurance with dynamics in the old contract, a detailed analysis is essential. Compare the guaranteed maturity benefit with and without continued dynamics. Consider your insurer's annual statements, which provide information on past performance and profit participation. The profit participation is not guaranteed and can be adjusted annually. For older contracts with a high guaranteed interest rate of, for example, four percent, it may be worthwhile to maintain the dynamics despite the costs, in order to benefit from the higher sum insured in retirement. An alternative might be to stop the dynamics and invest the saved amount elsewhere, for instance in a unit-linked endowment policy, if this matches your risk appetite. An individual calculation is crucial here. Note that the yield is reduced by the costs of dynamics, as each increase may incur new acquisition and administration costs. A careful consideration is key to optimising the use of your old contract.
Alternatives to Dynamics: What to do when the costs outweigh the benefits?
If the analysis reveals that the costs of the dynamics outweigh the benefits, there are several alternatives. You can oppose the dynamics and continue the contract with the previous contribution. This is often the simplest solution to avoid further cost increases. Another option is the contribution suspension of your endowment life insurance. Here, you no longer make contributions, but the contract continues with the capital accumulated so far and is only paid out at the end of the term. The death benefit usually remains in a reduced form. However, bear in mind that even with a contribution suspension, administrative costs may still be incurred, which can reduce the return. In some cases, a sale of the life insurance on the secondary market may be worth considering, as you often receive more than the pure surrender value from the insurer. Our expert tip: Always obtain multiple offers and check the buyer's credibility before selling your policy. Cancellation is usually the worst option, as it often involves high surrender penalties. A careful examination of all options is crucial.
Conclusion: Proactively managing your existing contract pays off
More useful links
Wikipedia offers a comprehensive overview of the dynamics in insurance.
Haufe provides information on income tax for endowment life insurance (old contracts).
Finanzamt NRW provides information on returns from endowment life insurance.
Ihre Vorsorge offers information on the maturity of life insurance policies.
Verbraucherzentrale provides information about terminating life insurance and better alternatives.
FAQ
How often can I object to the dynamics of my whole life insurance policy?
In general, you can object to the dynamics two or three times in a row before the right to further dynamic adjustments expires. You can find the specific regulations in your insurance terms and conditions.
Does halting the momentum impact my guaranteed interest rate?
No, the originally agreed guaranteed interest rate of your old contract will remain even if the dynamic adjustment is stopped, for the capital accumulated up to that point and the ongoing contributions (without dynamic increase).
Are the returns from my old endowment life insurance policy tax-free?
For contracts concluded before 2005, the returns are often tax-free. For later contracts, the returns are usually taxable, although under certain conditions (a term of at least 12 years, payout after the age of 62), there can be a half taxation of the returns.
What happens to my death cover if I stop the dynamics?
If you stop the dynamics, the death protection will no longer increase. The level of death protection achieved up to the time of stopping generally remains in place as long as you continue to pay the regular contributions.
Is it sensible to cancel an old endowment policy with dynamic adjustments?
A termination is usually associated with financial disadvantages, as only the surrender value is paid out and cancellation fees may apply. Alternatives such as contribution suspension, sale, or stopping the dynamism should be considered beforehand.
Where can I find information about the costs of my dynamics?
The annual policy statement from your insurer should provide information. If there are any uncertainties, request a detailed breakdown of the costs incurred due to dynamic increases.
