Introduction to contract review.
Can I rely on the Allianz KinderPolice InvestFlex?
A customer approached us with this exact question and presented us with their specific contract offer for review.
If you are currently considering this question, this blog article aims to provide orientation and better understanding. However, please note that individual parameters may lead to different results in your specific offer or contract review.
We do not intend to make blanket criticisms of the insurer or the evaluated tariff with this blog article but rather strive to objectively and objectively examine only the offer we have in its individual composition.
If you would like a specific review of your offer or existing contract, please feel free to contact us without any obligation.
More information: How does a contract review work?
Before we examine the details of the Allianz KinderPolice InvestFlex offer, it is important to mention some fundamental points that distinguish a good retirement plan.
Ensure that your retirement plan has a high, realistically expected return for the future.
Consider that all costs will reduce your return and therefore should be kept as small as possible.
Additional factors that can reduce returns: Depending on the investment, there are always several other negative factors that you should consider, which will reduce your returns. It’s important that you are aware of these factors from the beginning and factor them into your calculations.
Take advantage of the legal possibilities for tax reduction to achieve a high compound interest effect.
Do not underestimate the negative effects of inflation – protect your capital.
By considering these specific points, you have a high chance of actually increasing your invested capital in the long run.
Contract review master data.
Based on the offer we have in front of us, the monthly contribution is 50 euros with no initial investment. The assumed contribution duration covers the entire contract period of 63 years. There is no desire for a dynamic contribution adjustment. The age of the policyholder at the start of the contract is 4 years, and retirement is planned at 67 years old. With consistent contribution payments throughout the contract period, a total of 37,800.00 euros will be invested. Additional payments during the contract period and changes in contributions are not taken into account.
To determine whether a contract is truly worth it for you, it is important to first calculate the realistic average return (before costs and taxes) for the future.
The performance of individual securities, such as stocks or funds, is unpredictable. To provide a professional evaluation of an investment, it is important to delve deeper. This means first examining the sources of returns that the investment relies on, specifically the asset classes in which it is invested.
If we come across a facility with a hundred percent equity stake, we will utilize the long-term expected return of the stock market, which averages nine percent per year.
There are numerous scientific research studies on these “market returns” in different asset classes, which we refer to. Relevant literature references can be found at the end of this article.
Based on the market return, which is the long-term development that can also be assumed for the future, the various types of costs (such as contract costs and fund costs of the respective fund used) and the other factors that reduce returns are then deducted to determine a realistically expected customer return.
In the Allianze KinderPolice InvestFlex offer documents, it is stated that 100% of the contributions go into the Pictet – Global Megatrend Selection fund. This fund is an equity fund with an equity share of almost 100%. Therefore, we calculate with a performance of the global stock market of 9% per year – before costs and taxes (market return). From this, various factors that reduce returns need to be deducted in order to determine a realistic average customer return.
If you would like to learn more about the basics of a financial mathematics exam, you can find a link to a separate blog article that solely covers this topic below.
Costs as stated in the contract.
In the next step, it is necessary to research the various types of costs that significantly reduce your return. These include the costs of the insurer and the fund investment, which are withdrawn directly from the contract balance at different times. Although the other factors that reduce returns do not fall directly into the category of costs and are therefore not paid from the contract balance, they should also be considered as they have a direct impact on the return and thus on your invested capital.
Summary of costs: The cost of the alliance is 25,173.32 euros, and the cost of the capital investment is 106,845.89 euros.
This includes both the fund costs and other factors that reduce returns.
You can find the different types of costs incurred during the premium payment period of the insurer in the graphic. The following types of costs should be taken into account:
(Excerpt from the contract offer of Allianz KinderPolice InvestFlex, in which we have added the researched costs in red)
Alpha-Kosten is the closing and distribution costs. They are usually deducted from the contract balance over the five-year (60-month repayment period). Depending on the type of intermediary (insurance broker, insurance agent, etc.), these costs can be paid out to the intermediary as a commission of up to 100 percent. The calculation is based on multiplying the annual premium by the number of years of premium payment duration, and potentially adding an initial payment (called the valuation sum). For particularly long contract durations, the calculation of the valuation sum is limited to a certain number of years, typically 30 to 50 years depending on the insurer.
Dynamic adjustments (e.g. automatic five percent per year) and contribution increases during the contract term increase the valuation sum. In such a case, when calculating the new valuation sum, it is assumed that the increased amount will be invested until the end of the contribution payment period. The additional annual amount resulting from the contribution increase is multiplied by the contribution years in the future. Each time at the time of the increase, new acquisition and distribution costs are calculated.
Any additional payments during the contract period also incur new closing and distribution costs – typically similar to a one-time payment.
If you reduce or completely suspend contributions before the repayment period, you will not be charged any remaining closing and distribution costs. However, any costs that have already been calculated will not be refunded. After the repayment period ends, there will be no further reduction as the closing and distribution costs have already been fully charged.
In our contract offer for Allianz KinderPolice InvestFlex, we have determined an evaluation amount of 37,800.00 euros and alpha costs of 2.5 percent.
The annual contribution of 50 Euros for 12 months multiplied by a duration of 63 years equals a total contribution of 600 Euros.
37,800.00 Euros multiplied by 2.5 percent.
The cost of 945,00 Euro for Alpha is spread over 60 months.
(Excluding future changes or additional payments)
The amount of these costs depends on the contributions and is deducted from the contract balance immediately after each contribution payment. This type of cost belongs to the administrative costs of an insurance contract. Many insurers differentiate between ongoing contributions, one-time initial investments, and additional payments made during the contract term. Some insurers use a scale to calculate these costs, which often results in a reduction of beta costs over the contract term.
Early contribution reduction or contribution exemption results in adjustment of beta costs from the time of reduction. The disadvantage for you, in this case, is that if you are charged relatively high beta costs in the first few years due to the staggered calculation, you will only partially or not benefit from the later reduction as a customer.
Some insurers involve their customers in surplus participation, thereby reducing the beta costs.
Please note that the surpluses are determined annually and are not guaranteed. Therefore, they could also be completely eliminated for the entire remaining term of the contract as early as next year.
In our contract offer for Allianz KinderPolice InvestFlex, we have determined beta costs of 4.5 percent for each monthly contribution of 50 euros.
The calculation is as follows: 50 Euro multiplied by 4.5 percent equals 2.25 Euro. This amount is then multiplied by 12 months and 63 years of contribution duration.
The total cost of the Beta plan over the entire contract period is 1,701.00 Euros.
Gamma-Kosten is usually calculated as percentage costs based on the total contract balance at any given time. These costs typically make up the largest portion of expenses in long-term contracts. They are considered part of the administrative expenses of an insurance contract. Normally, these costs are calculated annually directly from the contract balance. However, some providers may also show Gamma-Kosten on a monthly basis, so it is important for individuals to verify the billing frequency used.
Over the years, ongoing contributions, dynamic adjustments, additional payments, and interest lead to an increasingly higher calculation basis. The fixed percentage cost rate often results in a significantly growing cost size, which is calculated from the contract balance. Some insurers also apply different percentage gamma cost rates for different types of contributions, such as ongoing payments or additional payments.
In our contract offer for Allianz KinderPolice InvestFlex, we have calculated annual gamma costs of 0.60 percent on the total contract balance.
It is not possible to accurately determine the Gamma costs before the contract is finalized due to the unpredictable nature of contract development. However, assuming a consistent contract development, an estimated cost amount for the entire contract term can be calculated. In the financial mathematical report on Allianz KinderPolice InvestFlex, we will see the total amount of insurer costs. Subtracting the specifically calculable other types of insurer costs, our calculations show a remaining amount for the Gamma costs.
The total cost of €22,527.32 for gamma expenses over the entire contract period is based on the assumption of consistently stable surplus participation.
Kappa costs are also known as administrative costs or unit costs. They are deducted directly from the contract balance. However, not all insurers charge these costs. If they are charged, they are a fixed annual amount, regardless of any specific contract details.
In our contract offer for Allianz KinderPolice InvestFlex, we were unable to determine Kappa’s costs.
This is an excerpt from the essential investor information of Pictet – Global Megatrend Selection.
The costs of the capital investment, specifically the fund, can be found in the excerpt from the “Key Investor Information Document”. The following types of costs should be distinguished:
Issue surcharges and redemption discounts.
These costs are incurred with each deposit or withdrawal and often serve as compensation for the bank or investment advisor. They may be deducted directly from the investment amount or paid separately by you. The calculation method can be misleading, as it can result in different costs.
Under certain conditions, these costs are occasionally discounted or waived entirely. However, often the ongoing costs of the fund are higher, which has significantly more negative effects on the long-term performance than the cost advantage from the discount on the front-end load. In most insurance-based retirement contracts, these types of costs are completely waived and therefore should not be considered.
The ongoing costs are deducted directly from the fund balance by the investment company. The amount of ongoing costs can be adjusted without your consent. You are not actively informed about this, but can only research on your own initiative after the end of a fiscal year to find out the percentage costs on your fund balance for the previous year.
Similar to gamma costs, the calculation basis also increases over the duration of the contract term. The ongoing contributions, dynamic adjustments, additional payments, and interest thus form an increasingly higher calculation basis over the years. The percentage cost rate therefore often results in a significantly increasing cost size, which is calculated from the fund balance.
In the essential investor information of the Pictet – Global Megatrend Selection, which is included in our contract offer for Allianz KinderPolice InvestFlex, we found annual ongoing costs amounting to 1.16 percent, after deducting surpluses, calculated on the total fund balance.
Due to the unpredictable performance of the fund, it is not possible to accurately quantify the ongoing fund costs for the future. In our financial mathematical analysis, we have therefore assumed a constant fund performance and no possible changes in the ongoing fund costs.
These factors are not directly charged to customers as fees. However, they must be considered because they have a direct impact on your return and therefore your capital.
#The amount of these factors is influenced by the investment strategy, so we classify them as costs of capital investment for better understanding. Like the ongoing costs explained above, these influencing factors are to be considered annually as a percentage and are not precisely calculable for the future. Hundreds of scientific studies confirm that there are several factors that reduce returns.
In our research on the Allianz KinderPolice InvestFlex contract offer and the selected investment strategy, we have taken into account the following factors that could potentially reduce returns.
Opportunity costs due to potentially unfavorable investment decisions compared to the scientific, evidence-based investment strategy are estimated to result in an average reduction of 0.50 percent per year in returns.
The estimated transaction costs are approximately 1.00 percent per year, resulting in a reduction in returns.
The chosen investment strategy is estimated to result in an average annual decrease in returns of 0.15 percent due to the cash lock-in mechanism.
For a detailed explanation of these and other negative influencing factors, we have written a separate comprehensive blog article. You can find the link to it at the end of this article.
In the literature references, you will find a study that highlights the differences between conventional asset management and evidence-based investing.
The result of our examination of the Allianz KinderPolice InvestFlex.
We have created an assessment with our financial mathematical software that displays all factors in euros on the results page, comprehensibly over the entire contract period.
The costs and other factors that reduce the return of a financial product directly affect the yield on your invested money. These are often difficult or sometimes not even visible in the extensive offer and contract documents.
The total amount of contributions made over 63 contract years is calculated by multiplying 50 Euros by 12 months and then by 63 years.
The total costs of the investment include fund fees and other factors that reduce returns.
Total costs of the alliance during the contract period, which are directly taken from the contract.
This is the representation of the total burden in euros over the 63-year contract period.
Projected gross end capital payout after 63 years.
Projected net capital payout after 63 years.
Projected gross pension after 63 years of contribution.
(A page from the financial mathematical report)
The total deposit over the contract term is 37,800.00 euros. The costs taken from the contract documents from Allianz amount to 25,173.32 euros. The total costs of the capital investment, plus other negative factors, amount to 106,845.89 euros.
The final capital amount is 212,639.41 euros. Upon full payment at the end of the contract, taxes are due on this final amount. Based on our tax requirements, this results in a one-time tax burden of 21,033.68 euros, leading to a net capital of 191,605.73 euros.
You can also receive a lifelong pension from the Allianz Children’s Policy InvestFlex. The monthly pension amount is determined by the contract balance at the start of the pension, multiplied by the guaranteed pension factor, at a minimum. Many insurers have repeatedly reduced the higher pension factors that arise from surpluses in recent years. Therefore, we calculate with the guaranteed pension factor, which is 18 euros per 10,000 euros of contract balance at the planned retirement age.
The monthly gross pension is calculated as 212.639,41 Euro divided by 10.000 and then multiplied by 18 Euro, resulting in 382,75 Euro.
Our conclusion on the Allianz KinderPolice InvestFlex.
At first glance, the result of receiving a lifelong gross retirement pension of over 382.75 euros from a monthly investment of 50 euros seems reasonable. Similarly, the ratio of 37,800.00 euros deposited to a net capital payout of 191,605.73 euros may also appear to be a good outcome.
However, the following should be taken into consideration:
If you choose to receive a monthly pension payment of 382.75 euros (before taxes) at the age of 67, instead of a lump sum payment of 212,639.41 euros (before taxes), you would have to receive the pension for 555 months, which is just over 46 years. Therefore, you would need to live to at least 113 years old in order to actually benefit from the pension option.
Additionally, it should be noted that due to the average inflation rate of approximately two percent per year, the purchasing power, or value, of the pension is greatly reduced. Taking into account this inflation rate, the pension of 382.75 euros will only have a “value” of 109.93 euros in 63 years.
If you choose the lump sum payment at the age of 67, you should also consider that the purchasing power of the payout will be greatly reduced by inflation.