## Introduction to contract review.

Can I rely on Swiss Life Maximo?

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

If you are currently grappling with this question, this blog article can help provide guidance and better understanding. However, please note that individual parameters may lead to different results in your specific offer or contract evaluation.

We do not aim to criticize the insurer or the examined tariff in a general manner with this blog article but rather strive to objectively and objectively examine only the transparent composition of the offer in front of us.

If you would like a specific review of your offer or existing contract, please feel free to contact us without any obligations or costs.

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

Before we examine the details of the Swiss Life Maximo offer, it is important to mention some fundamental points that distinguish a good retirement plan.

Make sure that your retirement plan has a high and realistic 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 type of investment, there are always a number of other negative factors to consider that can reduce your returns. It is important to be aware of these factors and factor them in from the beginning.

Take advantage of the legal opportunities for tax reduction to maximize the compound interest effect.

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

If you specifically consider these points, there is a high likelihood that your invested capital will actually grow in the end.

## Contract verification master data.

From the offer provided, we understand that the monthly contribution is 400 euros without an initial investment. The assumed contribution period is 31 years, covering the entire duration of the contract. There is no desire for a dynamic contribution adjustment. The age of the policyholder at the start of the contract is 36 years, with a planned retirement age of 67. With consistent contribution payments throughout the contract period, a total investment of 148,800.00 euros will be made. Additional payments during the contract period and changes in contributions are not taken into account.

To determine if a contract is truly worthwhile for you, it is necessary to first calculate the realistic average return (before costs and taxes) for the future.

The development of individual securities such as stocks or funds is unpredictable. 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, in other words, the asset classes in which the investment is made.

If we come across a facility with a hundred percent stock ownership, we will utilize the long-term expected return of the stock market, which is an average of nine percent per year.

There are numerous scientific research papers 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 other factors that reduce returns are then subtracted to determine a realistically expected customer return.

The Swiss Life Maximo documents show that 100% of the contributions go into the Swiss Life Funds (LUX) Equity ESG Euro Zone. This fund is an equity fund with an equity share of almost 100%. Therefore, we calculate a market return of 9% per year for the global stock market – 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 dedicated solely to this topic below this article.

## Costs are specified in the contract.

In the next step, it is important to research the different types of costs that significantly reduce your return on investment. This includes costs from the insurer and the fund investment, which are deducted 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 not paid from the contract balance, they should also be considered, as they have a direct impact on the return and therefore on your invested capital.

Summary of costs: The Swiss Life costs amount to 33,760.11 Euros, while the capital investment costs amount to 107,941.28 Euros.

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

You can find the different cost categories of the insurer during the premium payment period in the graphic. The following cost categories should be taken into account:

(Excerpt from the contract offer presented by Swiss Life Maximo, in which we have added the researched costs in red.)

Alpha-Kosten are the closing and distribution costs that are typically deducted from the contract value over the five-year (60-month repayment period). These costs are paid as a commission to the intermediary, depending on the type of intermediary (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 an initial payment if applicable (known as 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 (such as automatic five percent per year) and contribution increases during the contract period increase the valuation amount. In such a case, when calculating the new valuation amount, it is assumed that the increase 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 closing and distribution costs are calculated.

During the contract period, any additional payment also incurs new closing and distribution costs – typically similar to a one-time premium.

If you choose to reduce or completely stop making contributions before the end of 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 to you. After the repayment period has ended, there will be no further reduction as the closing and distribution costs have already been fully calculated.

In our contract offer for Swiss Life Maximo, we have calculated an assessment amount of 148,800.00 euros and alpha costs of 2.5 percent.

The annual contribution is 4,800 euros, multiplied by 31 years of payment.

The cost of 148,800.00 Euros at a rate of 2.5 percent will be 3,720.00 Euros, which will be spread out over 60 months.

(Subject to future changes or additional contributions)

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, initial investments, and additional payments made during the contract term. Some insurers use a scale to calculate these costs, which often leads to a reduction of Beta costs over the contract term.

Early contribution reduction or contribution exemption leads to an adjustment of the 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 allow their customers to participate in surplus distributions, which reduces the cost of beta.

Please note that the surpluses are annually reassessed and are not guaranteed. Therefore, they may also be completely eliminated for the entire remaining duration of the contract as early as next year.

In our contract offer for Swiss Life Maximo, we calculated beta costs of 11.94 percent for each monthly contribution of 400 euros. This amounts to 47.76 euros per month, multiplied by 12 months and 31 years of contribution duration, resulting in a total of 17,766.72 euros in beta costs over the entire contract period.

Gamma costs are a percentage cost rate that is typically calculated based on the total contract balance at a given time. These costs make up the largest portion of expenses for most long-term contracts. They are also considered part of the administrative costs of an insurance contract. Typically, these costs are calculated annually directly from the contract balance. However, some providers may also show gamma costs on a monthly basis, so it is important to check the billing frequency.

Over the years, ongoing contributions, dynamic adjustments, additional payments, and interest create an increasingly higher calculation basis. The fixed percentage cost rate often results in a significant increase in cost, which is calculated based on 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 of Swiss Life Maximo, we have determined annual gamma costs amounting to 0.35 percent on the entire contract balance.

It is not possible to accurately quantify the Gamma costs before the contract is signed due to the unpredictable nature of the 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 Swiss Life Maximo below, we will see the total amount of insurer costs. Subtracting the specifically calculable other types of insurer costs, our calculations result a remaining amount for the Gamma costs.

The total cost of Gamma is estimated at 11,157.39 Euros over the entire contract period, assuming a consistent surplus participation.

Kappa costs are also known as administrative costs or unit costs. These costs are deducted directly from the contract balance. However, not all insurers calculate this type of cost. If they are applied, it is a fixed annual amount, regardless of any individual contract details.

In our contract offer, we have determined annual Kappa costs of 36.00 euros.

The total cost of the Kappa contract over the entire term is 1,116.00 Euro, calculated as 36,00 Euro multiplied by 31 years of contribution duration.

This is an excerpt from the essential investor information of the Swiss Life Funds (LUX) Equity ESG Euro Zone.

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 are to be distinguished:

Sales charges and redemption fees.

These fees are charged for 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 by you. 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 a longer term 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 taken directly from the fund balance by the investment management company. The amount of ongoing costs can be adjusted without your consent. You are not actively informed about this, but you can research on your own after the end of a fiscal year to find out the percentage of costs on your fund balance last year. Just like the gamma costs, the calculation basis increases over the duration of the contract. The ongoing contributions, dynamic adjustments, additional payments, and interest all contribute to an increasing calculation basis over the years. Therefore, the percentage cost rate often leads to a significantly increasing cost size, which is calculated from the fund balance.

In the essential investor information of the Swiss Life Funds (Lux) Equity ESG Euro Zone, which is included in our Swiss Life Maximo contract offer, we find annual ongoing costs of 1.67 percent, 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 examination, we have therefore assumed a constant fund performance and no possible changes to the ongoing fund costs.

These factors are not directly fees charged to you as a customer. However, they must be taken into account because they have a direct impact on your return and therefore on your capital. The amount of these factors is influenced by the investment strategy, so we classify them as part of the costs of the investment. Just like the ongoing costs explained above, these influencing factors must also be considered on an annual percentage basis and are not exactly calculable for the future. Hundreds of scientific studies prove that there are a number of factors that reduce returns.

In the research for our Swiss Life Maximo contract offer and the selected investment strategy, we have taken into account 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 reduction in return of 0.50 percent.

Transaction costs are estimated to decrease annual returns by an average of 1.00 percent.

The chosen investment strategy is estimated to result in an average annual reduction in returns of 0.16 percent due to cash lock-in.

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 ist eine Studie zu finden, die die Unterschiede zwischen konventionellem Asset Management und evidenzbasiertem Investieren verdeutlicht.

## The result of our Swiss Life Maximo examination.

We have created a report with our financial mathematical software that presents all factors over the entire contract term in euros in a clear manner on the results page.

The costs and other factors that reduce returns of a financial product directly affect the return on your invested money. These are often difficult or sometimes not at all apparent in the extensive offer and contract documents.

The total amount of contributions paid over 31 years is calculated by multiplying 400 euros by 12 months and then by 31 years.

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

The total costs of Swiss Life during the contract period are directly deducted from the contract.

This represents the total burden in euros over the 31-year contract duration.

Projected gross end capital payout after 31 years.

Estimated net capital payout after 31 years.

Estimated gross pension after 31 years of contribution.

(Results page from the financial mathematical report)

The total deposit over the contract period is 148,800.00 Euros. The costs taken from the contract documents by Swiss Life amount to a total of 33,760.11 Euros. The total costs of the capital investment, plus other negative influencing factors, amount to 107,941.28 Euros.

The final capital amount is 268,055.24 Euros. Upon complete payout at the end of the contract, taxes are due on this final amount. According to our tax regulations, this results in a one-time tax burden of 14,346.74 Euros, resulting in a net capital of 253,708.49 Euros.

You can also receive a lifelong pension from Swiss Life Maximo. The amount of the monthly pension is based on the contract balance at the start of the pension, multiplied by the guaranteed pension factor, at least. 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 22.46 euros per 10,000 euros contract balance at the planned retirement age.

The monthly gross pension amount is calculated as follows: 268,055.24 Euros divided by 10,000, multiplied by 22.46 Euros, resulting in a guaranteed pension factor of 602.05 Euros.

## Our conclusion about Swiss Life Maximo.

At first glance, the result of receiving a lifelong gross pension of over 602.05 euros from a monthly investment of 400 euros seems decent. The ratio of 148,800.00 euros paid versus a net capital payout of 253,708.49 euros may also appear to be a good result at first glance.

However, the following must be taken into consideration.

If you choose to receive a monthly pension of 602.05 euros (before taxes) at the age of 67, instead of a lump sum payment of 268,055.24 euros (before taxes), you would have to receive the pension for 445 months, which is just over 37 years. Therefore, you would have to live to at least 104 years old 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 602.05 euros will only have a “value” of 325.86 euros in 31 years.