There are more and more life insurance policies, but the low interest rates on the financial markets are making business more difficult for insurers. The guaranteed interest rate has been falling for years - and consumers could soon be worse off in other areas as well: It is possible that policyholders will no longer participate in parts of the valuation reserve.

How does life insurance work?

There are different types of life insurance. Term life insurance provides financial security for surviving dependents in the event of death. Endowment life insurance, on the other hand, is also intended to provide for old age. There is a savings phase and a payout phase. When the latter is reached, the insurer distributes the premiums previously paid in by the customer on a regular basis. For many endowment policies, a certain sum and certain regular payments are guaranteed after the end of the accumulation phase.

What is the valuation reserve?

If an insurance company buys a stock for $100 from customer premiums, its book value on the balance sheet remains $100 five years later, even if the price has risen to $120. The $20 difference between market value and purchase value is the so-called valuation reserve or hidden reserve. Since a change in the law in 2008, insurance companies have had to pay out half of the valuation reserve to their customers whose policies expire.

What will change in the distribution practice?

The details are still unclear. Insurers complain above all that fixed-interest securities are also included in the calculation of the valuation reserve, which is why they currently have to pay out a particularly large amount of money. Due to the currently low interest rates, the values for older government bonds, for example, have risen sharply, as these bear higher interest rates than government bonds issued now.

What is the guaranteed interest rate?

Many consumers have also opted for endowment life insurance policies because the providers practically guarantee a kind of minimum interest rate for the capital paid in: the so-called Höchstrechnungszins, colloquially known as the guaranteed interest rate. This is set by the German Federal Ministry of Finance. It is currently 1.75 percent. In the past, the rate was significantly higher, in some cases as high as 4 percent in the 1990s. Since 2000, it has been going downhill. The reason: insurers have to invest their customers' money in crisis-proof forms of investment. However, the returns on these investments have been very low for years.

What does the low level of interest rates actually mean for life insurance policies?

In the case of life insurance policies with a guaranteed interest rate, this only forms part of the total return paid by insurers. There are also additional returns if insurers invest policyholders' money particularly well. However, since interest rates for bonds issued by crisis-resistant countries are falling, both the guaranteed interest rate and the surplus participation are generally shrinking. It should be noted that existing customers are generally not affected by reductions in the guaranteed interest rate.

Are life insurance policies still attractive for consumers?

Insurers say yes: Because lower guaranteed interest rates mean they have to set aside less money to secure premium guarantees and a minimum interest rate, they could take on higher risks - and thus also generate higher overall returns for policyholders. Consumer advocates, on the other hand, are now skeptical about traditional life insurance. In their opinion, too much money is spent on acquisition and administration costs as well as the risk portion, so that the savings portion falls by the wayside.

Does it make sense to cancel old policies?

Not in many cases. According to consumer protection experts, customers should also bear in mind that terminating a current contract always involves losses. Whether these losses are offset by a now possibly even higher participation in the valuation reserves must be calculated in each individual case.