# Is the Bayerische Fondspolice EXKLUSIV fund policy worth it?

## Introduction to contract review.

Can I rely on the Bavarian exclusive fund policy?

A customer approached us with this specific question and presented us with their contract proposal for review.

If you are currently dealing with this question, this blog article will help you orient yourself and better understand the topic. However, please note that individual parameters can lead to different results in your specific offer or contract review.

We do not intend to criticize the insurer or the reviewed tariff in general with this blog article but rather strive to objectively and objectively examine the offer that we have transparently in its individual composition.

If you would like a specific review of your offer or existing contract, you can contact us free of charge and without obligation.

## Further information: How does a contract review process work?

Before we examine the details of the Bayerische Fondspolice EXKLUSIV offer, it is important to mention some fundamental points that distinguish good retirement planning.

Ensure that your retirement plan has a high, realistically expected return on investment for the future.

Consider that all costs reduce your return and therefore should be kept as small as possible.

Additional factors that reduce returns: Depending on the investment, you must always consider a number of other negative factors that reduce your returns. It is important that you are aware of these factors and factor them in from the beginning.

Utilize the legal opportunities for tax reduction to maximize the compounding effect of interest.

Do not underestimate the negative impact of inflation – protect your capital.

If you specifically consider these points listed, there is a high likelihood that your invested capital will actually increase overall.

## Contract review master data.

Based on the offer we have, the monthly contribution is 400 euros without an initial investment. The assumed contribution period covers the entire contract term of 34 years. No dynamic contribution adjustment is desired.

The age of the policyholder at the start of the contract is 33 years, and retirement is planned at 67 years.

With consistent contribution payment throughout the contract term, a total of 163,200.00 euros will be invested. Additional payments during the contract term and changes in contributions are not considered.

To determine if 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. In order to provide a professional assessment of an investment, it is important to delve deeper. This means first examining the sources of returns that the investment relies on, or in other words, the asset classes in which the investment is allocated.

If we come across an investment with a 100% stock share, we will use the long-term expected return of the stock market, which is an average of nine percent per year.

There are numerous scientific research studies on these “market returns” in various asset classes, which we refer to. Relevant literature references can be found at the end of this article.

Starting from 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 other factors that reduce returns are then deducted to determine a realistically expected customer return.

The offer documents for the Bavarian fund policy EXCLUSIVE indicate that 100% of the contributions go into the Flossbach von Storch – Multi-Asset – Growth – R fund. This fund is an equity fund with an equity share of almost 75%. Therefore, we calculate with a return of approximately 7% per year on the global stock market – before costs and taxes (market return). From this, the various return-reducing factors are subtracted to determine a realistic average customer return.

If you want to learn more about the basics of a financial mathematics exam, you can find a link to a separate blog article that exclusively covers this topic below this article.

## Costs are stated in the contract.

In the next step, it is necessary for you to research the different types of costs that significantly reduce your return on investment. These include the costs of the insurer and the fund investment, which are directly deducted 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 not paid from the contract balance, they should also be considered as they have an immediate impact on the return and thus on your invested capital.

Summary of costs: The costs of the Bavarian company are 24,877.09 euros, and the costs of the capital investment are 104,994.87 euros.

This includes both fund costs and other factors that reduce returns.

The different types of costs incurred by the insurer during the premium payment period can be seen in the graphic. The following types of costs should be taken into account:

(This is an excerpt from the contract offer of the Bavarian Fondspolice EXKLUSIV, in which we have added the researched costs in red.)

Alpha-Kosten is the closing and distribution costs that are typically deducted from the contract balance over the five-year repayment period. These costs are paid as commissions to the intermediary, depending on their type (insurance broker, insurance agent, etc.), up to 100 percent. The calculation is based on multiplying the annual premium by the years of premium payment duration and adding any initial payment (known as the valuation amount). For longer contract terms, the calculation of the valuation amount is limited to a certain number of years, usually 30 to 50 years, depending on the insurer.

Dynamic adjustments (such as a five percent increase per year) and contribution increases during the contract period 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 the increase occurs, new closing 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 contribution.

If contributions are reduced or completely suspended before the repayment period, the outstanding closing and distribution costs will not be further charged. However, already calculated costs will not be refunded. After the end of the repayment period, no further reduction will occur as the closing and distribution costs have already been fully charged.

In our contract offer of the Bavarian Fondspolice EXKLUSIV, we have determined an evaluation amount of 163,200.00 euros and alpha costs of 2.5 percent.

The annual contribution of 400 euros for 12 months over a period of 34 years amounts to a total of 4,800 euros.

The total amount is 163,200.00 Euro multiplied by 2.5 percent.

The total cost of 4,080.00 Euros for Alpha is divided over 60 months.

(Excluding future changes or additional payments)

The amount of Beta costs depends on the contributions and is deducted from the contract balance immediately after each contribution payment. This type of cost is part of 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 will result in the 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 tier calculation, you will only partially or not benefit from the later reduction as a customer.

Some insurers involve their customers in the surplus participation, which reduces the beta costs.

Attention: The surpluses are set annually and are not guaranteed. Therefore, they could also completely disappear next year for the entire remaining term of the contract.

In our contract offer, the Bayerische Fondspolice EXKLUSIV, we have calculated beta costs of 9.63 percent for each monthly contribution of 400 euros.

The calculation is as follows: 400 Euro multiplied by 9.63 percent equals 38.52 Euro multiplied by 12 months multiplied by 34 years of contribution duration.

The total contract cost for the entire duration is 15,716.16 Euros.

Gamma-Kosten are calculated as percentage costs based on the total contract value at any given time. These costs make up the largest portion of expenses for long-term contracts. They are considered administrative costs of an insurance contract. Typically, they are calculated annually directly from the contract value. However, some providers may calculate Gamma-Kosten monthly, so it is important for individuals to verify the billing frequency.

Over the years, ongoing contributions, dynamic adjustments, additional payments, and interest accumulation contribute to an increasing calculation basis. The fixed percentage cost rate often results to a significant increase of the cost size, which is calculated based on the contract balance. Additionally, some insurance companies apply different percentage gamma cost rates for various types of contributions, such as ongoing payments or additional payments.

In our contract offer, the Bavarian Fund Policy EXCLUSIVE, we have determined annual gamma costs amounting to 0.14 percent of the total contract balance.

It is not possible to accurately quantify the Gamma costs before the contract is signed due to unpredictable contract development. However, assuming a consistent contract development, an estimated cost amount for the entire contract period can be determined. In the financial mathematical assessment of the Bavarian fund policy EXCLUSIVE presented below, we will see the total amount of insurer costs. Subtracting the specifically calculable other types of insurer costs, our calculations yield a remaining amount for the Gamma costs.

The total cost of the Gamma expenses over the entire contract period, assuming a consistently constant surplus participation, is 5,080.93 euros.

Kappa-Kosten are also known as administrative costs or unit costs. They are deducted directly from the contract balance. However, not all insurers calculate these costs. If they do apply, they are a fixed annual amount, regardless of any individual contract details.

In our contract offer for the Bayerische Fondspolice EXKLUSIV, we were unable to determine Kappa costs.

This is an excerpt from the essential investor information of Flossbach von Storch – Multi Asset – Growth – R.

The costs of the capital investment, which refers to the fund, can be found in the excerpt from the “Essential Investor Information”. The following types of costs should be distinguished.

Issue surcharges and redemption discounts.

These costs occur with each deposit or withdrawal and often serve as compensation for a bank or investment advisor. They may be deducted directly from the investment amount or must be paid separately. The calculation method can be misleading, as it leads to different costs. Under certain conditions, these costs are occasionally discounted or waived entirely. However, often the ongoing costs of a fund are higher, which has a significantly more negative impact on longer-term performance than the cost advantage from the discount on the sales charge. In most insurance-based retirement contracts, these types of costs are completely waived and therefore should not be considered.

The ongoing costs are taken 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 research the percentage costs on your fund balance at the end of a fiscal year. Like the gamma costs, the calculation basis also increases over the duration of the contract. The ongoing contributions, dynamic adjustments, additional payments, and interest form a higher and higher calculation basis over the years. Therefore, the percentage cost rate often results In a significantly increasing cost size, which is calculated from the fund balance.

The Flossbach von Storch – Multi Asset – Growth – R, which is included in our contract offer for the Bayerische Fondspolice EXKLUSIV, has annual ongoing costs of 1.62 percent, calculated on the total fund balance. After offsetting excesses of 0.6 percent, the annual ongoing costs amount to 1.02 percent. 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 therefore assumed a constant fund development and no possible changes to the ongoing fund costs.

These factors are not direct fees charged to you as a customer. However, they must be considered because they directly impact your returns and therefore your capital. The amount of these factors is influenced by the investment strategy, so we categorize them as part of the costs of capital investment for better understanding. Just like the ongoing costs explained above, these influencing factors must be considered annually as a percentage and cannot be precisely calculated for the future. Hundreds of scientific studies confirm the existence of several factors that reduce returns.

In the research for our contract offer of the Bayerische Fondspolice EXKLUSIV and the selected investment strategy, we have considered the following factors that may reduce returns.

Opportunity costs due to potentially unfavorable investment decisions compared to a scientific, evidence-based investment strategy* are estimated to result in an average annual return reduction of 0.50 percent.

Transaction costs are estimated to cause an average annual reduction in yield of 1.00 percent.

The estimated annual reduction in return due to the chosen investment strategy is 0.32 percent.

For a detailed explanation of these and other negative influencing factors, we have written a separate extensive blog article. You can find the link to it at the end of this article.

In der Literaturangaben wird eine Studie aufgeführt, die die Unterschiede zwischen konventionellem Asset Management und evidenzbasiertem Investieren verdeutlicht.

## The result of our examination of the Bavarian Exclusive Fund Policy.

We have created an assessment with our financial mathematical software that presents all factors in euros comprehensibly on the results page throughout the entire contract period.

The costs and other factors that reduce returns of a financial product directly impact the yield on your invested money. These are often difficult or partially not apparent in the extensive offering and contract documents.

The total amount of contributions made over 34 years is calculated by multiplying 400 Euros by 12 months and then multiplying that by 34 years.

The total costs of the capital investment include fund costs and other factors that reduce returns.

The total costs of the Bavarian during the contract period will be directly deducted from the contract.

This is the representation of the total burden in euros over the 34-year contract period.

Projected gross final capital payout after 34 years.

Projected net capital payout after 34 years.

Projected gross pension after 34 years of contribution.

Here is the results page from the financial mathematical report.

The total deposit over the contract term is 163,200.00 euros. The costs identified in the contract documents from Bayerische amount to a total of 24,877.09 euros. The total costs of the investment, including other negative factors, amount to 104,994.87 euros.

The final capital is 267,196.85 euros. Taxes are due on this final amount if paid out in full at the end of the contract. Based on our tax requirements, this results in a one-time tax burden of 12,511.12 euros, resulting in a net capital of 254,685.73 euros.

You can also receive a lifelong annuity from the Bavarian Fondspolice EXCLUSIVE. The monthly annuity amount is determined by the contract balance at the start of the annuity, at minimum multiplied by the guaranteed annuity factor. Many insurers have repeatedly reduced the higher annuity factors resulting from surpluses in recent years. Therefore, we calculate with the guaranteed annuity factor, which is 24.96 euros per 10,000 euros contract balance at the planned retirement age.

The monthly gross pension is calculated as 267.196,85 Euro divided by 10.000, multiplied by 24.96 Euro, resulting in 666.92 Euro.

## Our conclusion on the Bavarian Exclusive Fund Policy.

At first glance, the result of receiving a lifelong gross pension of over 666.92 euros from a monthly investment of 400 euros seems reasonable. Similarly, the ratio of 163,200.00 euros deposited to a net capital payout of 254,685.73 euros may also appear to be a good result.

However, the following should be taken into consideration:

If you choose to receive a monthly pension of 666.92 euros (before taxes) at the age of 67, instead of a lump sum payment of 267,196.85 euros (before taxes), you would have to receive the pension for 400 months, which is just over 33 years. Therefore, you would need to live to at least 100 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 significantly reduced. Taking into account this inflation rate, the pension of 666.92 euros will only have a “value” of 340.15 euros in 34 years.