Is the WWK Premium FondsRente (tariff: FV08 NT) worth it?
Introduction to contract review.
Can I rely on the WWK Premium FondsRente?
A customer approached us with this specific question and presented us with their contract offer for examination.
If you are currently grappling with this question, this blog article aims to provide guidance and enhance your understanding. However, please note that individual parameters may lead to a different outcome in your specific assessment of offers or contracts.
We do not intend to criticize the insurer or the policy in question as a whole, but rather strive to objectively and objectively evaluate the transparent composition of the offer at hand.
If you also desire a specific review of your offer or existing contract, please feel free to contact us without any obligation.
Further information: How does a contract review process work?
Before we examine the details of the WWK Premium FondsRente 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 reduce your return and therefore should be kept as small as possible.
Additional factors that can reduce returns: Depending on the investment, you must always consider a number of other negative factors that will decrease your returns. It is important that you are aware of these factors from the beginning and factor them into your calculations.
Take advantage of the legal possibilities for reducing taxes to achieve a compounding effect of high interest.
Do not underestimate the negative effects of inflation – protect your capital.
If you specifically consider these points listed, there is a high chance that your invested capital will actually increase in the end.
Data of contract review.
According to the offer in front of us, the monthly contribution is 400 Euros without an initial investment. The assumed contribution period spans the entire contract term of 29 years. No dynamic contribution adjustment is desired. The age of the policyholder at the start of the contract is 38 years, and retirement is planned at 67 years. With consistent contribution payments throughout the contract term, a total of 139,200.00 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, the first step is to 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 assessment of an investment, it is important to dig deeper. This means first examining the sources of returns that the investment relies on, specifically the asset classes it invests in.
If we come across an investment with a hundred percent stock ownership, we will use the long-term expected return of the stock market, which averages about nine percent per year.
There are numerous scientific research studies available on these “market returns” in various 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 to be expected in the future as well, 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 WWK Premium FondsRente documents show that 100% of the contributions go into the DWS Global Growth fund. This fund is an equity fund with an equity share of almost 100%. Therefore, we calculate with a market return of 9% per year for the global stock market – before costs and taxes (market return). From this, the various factors reducing returns need to be subtracted 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 below this post that exclusively covers this topic.
Costs are stated in the contract.
In the next step, it is necessary to research the various 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 a direct impact on the return and therefore on your invested capital.
Summary of costs: WWK costs: 28,218.83 euros – Capital investment costs: 87,537.99 euros.
This includes both the fund costs as well as other factors that reduce returns.
The different cost types of the insurer during the premium payment period can be seen from the graph. The following cost types should be considered:
(Excerpt from the contract proposal of WWK Premium FondsRente, in which we have added the researched costs in red.)
Alpha-Kosten are the closing and distribution costs, which are usually deducted from the contract balance over the five years (60 months of repayment time). These costs are paid out to the intermediary as commission, up to 100 percent depending on the type of intermediary (insurance broker, insurance agent, etc.). The annual premium is multiplied by the years of premium payment duration to calculate the cost, and an initial payment (the so-called valuation sum) may be added. In the calculation of the valuation sum for particularly long contract terms, the years are limited, typically 30 to 50 years depending on the insurer.
Dynamic adjustments (such as 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 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 acquisition and distribution costs are calculated.
Any additional payments during the contract period also incur new closing and distribution costs – usually similar to a single premium.
If you choose to reduce or completely stop your contributions before the repayment period ends, you will not be charged any remaining closing and distribution costs. However, any already calculated costs will not be refunded to you. After the repayment period ends, there will be no further reductions as the closing and distribution costs have already been fully charged to you.
In our contract offer for the WWK Premium FondsRente, we have determined an assessment amount of 139,200.00 euros and alpha costs of 2.5 percent.
The annual contribution of 400 Euros for 12 months adds up to a total of 4,800 Euros over a 29-year contribution period.
The calculation is 139,200.00 Euros multiplied by 2.5 percent.
The cost of Alpha is 3,480.00 Euros, which will be 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 classified as administrative costs of an insurance contract. Many insurers differentiate between ongoing contributions, initial one-time investments, and additional payments made during the contract period. Some insurers use a scale to calculate these costs, which often results i
The early reduction or exemption of contributions results in adjusted 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 surplus participation, which reduces the beta costs.
Please note that the surpluses are annually determined and 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 of WWK Premium FondsRente, we have calculated beta costs of 11.64 percent for every monthly contribution of 400 euros. Surpluses of 1 percent have already been deducted here.
The calculation is as follows: 400 Euro multiplied by 11.64 percent equals 46.56 Euro. Then multiply by 12 months and 29 years of contribution duration.
The total cost over the entire contract period is 16,202.88 Euros.
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 insurance contracts with long durations. They are 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 display gamma costs on a monthly basis, so it is important to verify the billing frequency being used.
Over the years, ongoing contributions, dynamic adjustments, additional payments, and interest rates create a growing basis for calculations. The fixed percentage cost rate often leads to a significant increase of 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 contributions or additional payments.
In our contract offer for the WWK Premium FondsRente, we have calculated annual gamma costs of 0.30 percent on the total contract balance.
Due to the unpredictable contract development, it is not possible to accurately quantify the gamma costs before contract conclusion. However, assuming a consistent contract development, an estimated cost amount for the entire contract term can be determined. In the financial mathematical report on the WWK Premium FondsRente below, we will see the total amount of insurance costs. Subtracting the specifically calculable other insurance cost types, our calculations result a remaining amount for the gamma costs.
The total cost of gamma over the entire contract term is 8,535.95 Euros, assuming a consistently stable surplus participation.
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 are applied, they are a fixed annual amount, regardless of any individual contract details.
In our contract offer for the WWK Premium FondsRente, we were unable to determine the Kappa costs.
This is an excerpt from the essential investor information of DWS Global Growth.
The costs of the capital investment, specifically 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 fees are charged for each deposit or withdrawal and often serve as compensation for a bank or investment advisor. They are 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 completely. 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 sales charge. In most insurance-based pension 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 can only research on your own initiative 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 also increases over the duration of the contract. 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.
According to the essential investor information of the DWS Global Growth fund, which is included in our contract offer for the WWK Premium Fund Pension, we find annual ongoing costs of 1.10 percent after deducting fund surpluses of 0.35 percent, which are calculated on the total fund balance. Due to the unpredictable development of the fund, it is not possible to precisely quantify the ongoing fund costs for the future. In our financial mathematical review, we therefore assumed a constant fund development and no possible changes in the ongoing fund costs.
These factors are not direct fees charged to you as a customer. 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 part of the costs of capital investment for better understanding. 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 that there are a number of factors that reduce returns.
In the analysis of our contract offer for the WWK Premium FondsRente and the selected investment strategy, we have taken into account the following factors that may decrease the return.
Opportunity costs due to potentially unfavorable investment decisions, compared to the scientific, evidence-based investment strategy, are estimated to result in an average annual return reduction of 0.50 percent.
Transaction costs are estimated to average 1.00 percent per year, reducing returns.
The chosen investment strategy is estimated to result in an average annual reduction of 0.43 percent in returns 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 the literature references, you will find a study that illustrates the differences between conventional asset management and evidence-based investing.
The result of our examination on the WWK Premium FondsRente.
We have created an assessment with our financial mathematical software, which presents all factors throughout the entire contract term in Euros on the results page in a clear manner.
The costs and other factors that reduce the return of a financial product directly impact the yield on your invested money. These are often difficult or partially not visible in the extensive offers and contract documents.
The total amount of contributions paid over 29 years is calculated by multiplying 400 Euros by 12 months and then by 29 years.
The total costs of the capital investment include fund expenses and other factors that reduce returns.
Total costs of the WWK during the contract period, which are directly deducted from the contract.
(4) Hierbei handelt es sich um die Darstellung der Gesamtbelastung in Euro über die 29 Jahre Vertragsdauer.
Projected gross final capital payout after 29 years.
Estimated net capital payout after 29 years.
Projected gross pension after 29 years of contribution.
Results page from the financial mathematical report.
The total deposit over the contract period is 139,200.00 euros. The cost items taken from the contract documents of WWK amount to a total of 28,218.83 euros. The total costs of the capital investment, including other negative influencing factors, amount to 115,756.82 euros.
The final capital amount is €256,355.30. Taxes are due on this final amount if fully paid out at the end of the contract. Based on our tax regulations, this results in a one-time tax liability of €14,094.12, leading to a net capital of €242,261.19.
You can also receive a lifetime pension from the WWK Premium FondsRente. 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 resulting from surpluses in recent years. Therefore, we calculate with the guaranteed pension factor, which is 26.88 euros per 10,000 euros of contract balance at the planned retirement age.
The monthly gross retirement amount is 689.08 Euros, calculated by dividing 256,355.30 Euros by 10,000 and multiplying it by 26.88 Euros, the guaranteed annuity factor.
Our conclusion on the WWK Premium FondsRente.
The result of investing 400 euros per month and receiving a lifelong gross pension of over 689.08 euros may seem decent at first glance. Similarly, the ratio of 139,200.00 euros deposited to a net capital payout of 242,261.19 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 of 689.08 euros (before taxes) at the age of 67, instead of a one-time payment of 256,355.30 euros (before taxes), you would have to receive the pension for 372 months, which is just over 31 years. Therefore, you would have to live to at least 98 years old to actually benefit from the pension option.
Additionally, it should be noted that due 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 689.08 euros will only have a “value” of 388.03 euros in 29 years.
If you choose to receive a lump sum payment at the age of 67, you should also consider that the purchasing power of the payment will be greatly reduced by inflation.