Endowment life insurance with dynamic old policy: optimising opportunities and pitfalls
13.04.25
10
Minutes
Katrin Straub
Managing Director at nextsure
Do you have an older endowment life insurance policy with a dynamic option? These contracts can be valuable, but they can also hide cost traps. Find out how to review and optimise your existing policy.
The topic in brief and concise terms
Older endowment life insurance policies with indexation can offer high guaranteed interest rates, but each indexation increase can incur new costs.
You can usually object to the adjustment; check your contractual terms to see how often this is possible before the right expires.
A precise analysis of the costs and benefits of the dynamic is crucial to optimising the return on your existing contract.
Dynamics in older contracts: What you should know
A whole life insurance policy with indexation in an older policy means that your premium and, as a result, the guaranteed sum assured also increase each year by an agreed percentage. The aim is to protect the value of your policy against inflation. For policies taken out, for example, before the year 2000, the guaranteed interest rate may still be as high as four per cent. It is therefore important to check exactly which conditions apply to your specific older policy. The indexation can help to adjust the cover to rising living costs. However, this adjustment is not always associated with additional costs, as we will see later.
The cost trap of dynamic pricing: Identifying hidden fees
Although the dynamic increase is intended to boost the growth in value of your endowment life insurance policy, caution is advised. With each dynamic increase, new policy arrangement and commission costs may be incurred, as if a new small contract were being taken out. These costs are often deducted from your contributions over the first five years of each increase. This means that you may repeatedly pay new costs over the entire term. Our expert tip: Ask your insurer for a detailed breakdown of the cost structure of your dynamic increases. This will help you understand how much of your premium increase is actually going into the savings component. The consumer advice centre recommends checking whether it makes sense to keep a dynamic increase for older policies with good interest rates, but also considering the option of suspending or stopping it. The decision depends very much on your individual situation.
Guaranteed interest rate on legacy contracts: a valuable anchor?
Old contracts, especially those from the 1990s, often have a guaranteed interest rate of, for example, 3.25 per cent or even four per cent. However, this guaranteed interest rate applies only to the savings portion of your contributions, i.e. 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 guaranteed interest rate agreed at the outset applies for the entire term of your old contract and is unaffected by later reductions in the maximum technical interest rate. For new contracts, the guaranteed interest rate has been only 0.25 per cent since 2022. This underlines the potential value of older policies. A paid-up endowment life insurance can be an option, but should be carefully considered.
Options for action: adjust the momentum or stop it?
You are not at the mercy of indexation. As a rule, you have the right to object to each annual increase. The exact conditions governing how often you can object before the indexation right lapses (often after two or three consecutive objections) can be found in your policy terms and conditions. Stopping indexation can make sense if the costs outweigh the benefits or your financial needs are already covered. Consider the following steps:
Check the amount of the annual costs for the indexation increase.
Compare the guaranteed increase in benefits with the additional costs.
Assess your current and future cover needs.
Find out about the tax implications of a change.
Consider suspending indexation if you would like temporary financial relief.
Clarify whether reducing the indexation percentage is possible, often down to a minimum of three per cent.
A change to old insurance contracts should always be made carefully. Weigh up whether the benefits of a lower premium burden outweigh the potentially lower maturity benefit.
In-depth expertise: legal aspects and recent rulings
The calculation of acquisition costs for dynamic increases is a complex area. Each increase is often treated like a new policy, which means that commissions can again be deducted from the additional contribution. By law, for example, 2.5 per cent of the premium sum may be charged as acquisition costs and spread over the first five years. With annual increases of ten per cent on an initial premium of 100 euros, substantial commission payments can therefore accumulate over the years. There have repeatedly been debates in the past, as well as rulings on life insurance, that dealt with the transparency and appropriateness of costs. Our expert tip: If you are unsure about the costs or the performance of your policy, independent advice, for example from consumer advice centres, can be worthwhile. They can also check whether an objection to the contract on the grounds of incorrect disclosures may be possible. The tax treatment of returns from endowment life insurance policies taken out after 31 December 2004 must also be noted; here, returns are generally taxable, although under certain conditions (term of at least twelve years, payout after age 62) a 50 per cent tax exemption may apply.
Optimising returns: strategies for your existing contract
To optimise the return on your endowment life insurance policy with indexation in an old contract, a careful analysis is essential. Compare the guaranteed maturity benefit with and without continued indexation. In doing so, take into account your insurer’s annual statements, which provide information on previous performance and profit participation. Profit participation is not guaranteed and can be reset each year. In older contracts with a high guaranteed interest rate of, for example, four per cent, it may be worthwhile to keep the indexation despite the associated costs, in order to benefit from the higher sum insured in later life. An alternative could be to stop the indexation and invest the amount saved elsewhere, for example in a unit-linked endowment life insurance policy, if this suits your risk appetite. An individual calculation is crucial here. Please note that returns are reduced by the costs of indexation, as new acquisition and administration costs may be deducted again from each increase. Careful consideration is the key to making the best use of your old contract.
If the analysis shows that the costs of the policy increase option outweigh the benefits, there are several alternatives. You can object to the increase and let the policy continue with the current premium. This is often the simplest solution to avoid further cost increases. Another option is the paid-up status of your endowment life insurance. In this case, you stop making any further contributions, but the contract continues with the capital accumulated up to that point 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 in the event of a paid-up policy, administration costs may still arise, which reduce the return. In some cases, selling the life insurance policy on the secondary market may also be worth considering, as you will often receive more than the insurer’s pure surrender value. Our expert tip: Always obtain several offers and check the buyer’s credibility before selling your policy. Cancellation is usually the worst option, as it often involves high surrender deductions. Careful consideration of all options is essential.
Conclusion: Proactive management of your existing contract pays off
The built-in increase feature in an older endowment life insurance policy can be a double-edged sword. On the one hand, it offers the chance of a higher maturity benefit and an offset against inflation; on the other hand, recurring costs can reduce returns. A blanket recommendation is difficult, as the individual contract situation, the guaranteed interest rate and the cost structure are decisive. Take a close look at your policy: check the annual statements, question the cost of the increases and weigh up whether the increases are in your interests. In many cases, adjusting or stopping the increase feature can make sense in order to secure the returns on your valuable older policy. If you are unsure, professional advice can help you make the right decision for your financial future. nextsure will be happy to help you analyse your insurance situation and identify potential for optimisation. Request your individual risk analysis now: Have your insurance situation reviewed free of charge and receive specific suggestions for improvement.
More useful links
Wikipedia offers a comprehensive overview of insurance dynamics.
Haufe provides information on income tax for capital life insurance policies (legacy contracts).
NRW Tax Office provides information on returns from capital life insurance policies.
Your Financial Provision provides information on the maturity of life insurance policies.
Consumer Advice Centre provides information on cancelling life insurance policies and better alternatives.
FAQ
How often can I object to the automatic increase in my capital life insurance?
As a rule, you can object to the adjustment two or three times in succession before the right to further dynamic adjustments expires. You can find the exact provisions in your insurance terms and conditions.
Does stopping the dynamic adjustment affect my guaranteed interest rate?
No, the guaranteed interest rate originally agreed in your existing contract will continue to apply, even if the dynamic increase is stopped, for the capital accumulated up to that point and the ongoing contributions (without any dynamic increase).
Are the returns from my old endowment life insurance 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 (term of at least 12 years, payout after the age of 62) the returns may be taxed at half rate.
What happens to my death benefit cover if I stop the indexation?
If you stop the escalation, the death benefit will not continue to increase. The death benefit reached up to the time of the stop usually remains in place as long as you continue to pay the regular contributions.
Is it sensible to cancel an old endowment life insurance policy with automatic increases?
Cancellation is usually associated with financial disadvantages, as only the surrender value is paid out and cancellation fees may apply. Alternatives such as premium-free status, sale or stopping the indexation should be checked first.
Where can I find information about the costs of my Dynamik?
Your insurer’s annual statement should provide clarification. If anything is unclear, request a detailed breakdown of the costs arising from the automatic increases.
