Buyback (life insurance)
A surrender is the termination of a life insurance policy by the policyholder , provided that a surrender value has to be paid in the event of termination under the contract or the law .
In the original sense of the word, the insurer “buys back” the rights of the policyholder from the insurance contract from the policyholder . Since the policyholder usually initiates the buyback, it has become common to say that the policyholder “buys back” the contract even though he is the one who is entitled to a payment.
This is to be distinguished from the surrender on the secondary market for life insurance , where some companies buy up rights from insurance contracts, continue these contracts - which in turn can be bought back by the policyholder, so that in the end he is the owner of the rights from the contract again.
Who can buy back?
Legal regulations
In the case of life insurance contracts, "for which the insurer's obligation is certain", the policyholder is entitled to the end of the current insurance period at any time in accordance with the Insurance Contract Act ( Section 169 of the Insurance Contract Act Germany , Section 176 VVG Austria and Art. 91 VVG Switzerland ) Surrender value too. This means that there is basically a right of surrender if there is actually a positive surrender value at this point in time.
Are particularly affected
- Life insurance on death and survival
- private pension insurance in the deferred period with return of contributions in the event of death and in the pension withdrawal period in the case of a pension guarantee
- Education insurance
- Death benefit insurance
Contractual regulations
With other life insurance contracts, there is only a right of surrender if this is contractually agreed. A contractual right of surrender is often granted to the policyholder for all life insurance and occupational disability insurance policies . However, with many contracts the surrender value is initially zero, if not even over a (large) part of the term of the contract.
In accordance with Section 169 (2) VVG Germany , no surrender value is provided for life / pension insurance policies that do not provide for any further biometric risk other than survival (occupational disability, death protection, premium refund). A withdrawal exception can only guarantee an additional contractual agreement.
Insurance with no right of surrender
In many cases, the following insurances are not redeemable:
- Pension insurance in the deferment period, for which no death benefit has been agreed (usually not redeemable to avoid anti-selection)
- Pension insurance with a pension (regularly not redeemable to avoid anti-selection)
- Term life insurance (usually zero surrender value or basically not surrenderable)
- Basic pensions (not redeemable due to legal requirements); As in all other cases, these can only be made non-contributory .
In an individual contract, there is the possibility of agreeing a full or partial exclusion of exploitation . The consequence of this is that the rights from the contract can no longer be bought back, even partially. This case is important for contracts that are entered into in connection with the external sharing of rights in the case of pension equalization in the context of divorce proceedings, or that serve to protect against liquidation options in the event of insolvency or Hartz IV .
Special feature of direct insurance
A direct insurance can not be repurchased by the employee, as the right of termination is only payable to the employer as the policyholder. There is usually a ban on exploitation until the start of retirement, even after leaving the company, especially when transferring to a new policyholder (new employer).
Legal consequences of the buyback
In the event of surrender in accordance with the statutory regulations, the insurer is obliged to pay the policyholder the surrender value. However, if this exceeds the benefit that would be due in the event of death, only the death benefit is paid out and the excess amount is used to create a non-contributory insurance.
As part of the surrender value, the insurer must pay the policyholder the surplus shares already allocated , the final bonus portion provided for in the event of termination and, in the case of contract terminations since 2008, at least half of the valuation reserves attributable to this contract .
In the event of a buyback in accordance with a contractual agreement, the legal consequence that is agreed in the contract applies.
The insurance contract becomes null and void on surrender.
Economic aspects of the buyback
In Germany, around every third life insurance policy ends with a buyback. The repurchase is economically disadvantageous for both the policyholder and the insurer in the beginning. The economic benefit of a buyback late in the contract depends on the circumstances of the individual case. Many buybacks also take place as part of a flexible termination arrangement shortly before the actual end of the contract. The regulations ensure that there are no disadvantages for the policyholder.
Depending on the contractual agreement, the surrender value is reduced by a cancellation discount and, under certain circumstances, certain long-term benefits from the profit participation, in particular in the context of the final profit participation, are no longer applicable. Contributions that have already been paid that are not matched by any entitlement to benefits, mostly because they were intended to cover acquisition costs, are only partially included in the determination of the surrender value. Finally, in the case of contracts concluded after 2005, a buyback before the expiry of 12 years leads to income tax liability.
The insurer incurs costs as a result of a buyback and no expected future profits. In the initial period, the surrender value may be so high that the remaining amounts in particular do not cover the acquisition costs already incurred, i.e. the insurer and the remaining with- profits contracts make a total loss from the outgoing contract. Furthermore, the need to make the payment amount liquid early can result in further losses. The collective becomes smaller due to the outgoing contract and thus the risk compensation in the collective is also reduced. The cancellation discount is charged to cover the two last-mentioned disadvantages of the insurer.
Alternatives to buyback
For a policyholder who is in economic difficulties, there are the following alternatives to repurchase:
- He can demand exemption from contributions within the framework of the legal requirements.
- He can try to "sell" his insurance on the secondary market for life insurance .
- He can apply for a policy loan from the insurer .
- He can only “partially” buy back the contract with the consent of the insurer.