Scandal in German Life Insurance: How a 17-Year Policy Returned Just €4.84 in Profit

The Math That Doesn’t Work

Let’s break down what actually happened. The policyholder contributed €600 annually for 17.5 years. Even parking that money in a basic German savings account (Sparbuch) at an average 1% interest would have yielded around €11,500, a €1,000 profit. A simple ETF tracking the DAX would have performed significantly better. Yet this sophisticated financial product, managed by professionals investing in capital markets, delivered less than five euros.

The immediate reaction from defenders of these products is predictable: “But it’s insurance!” And they’re technically correct. These policies combine two distinct financial services: investment accumulation and life insurance coverage. If the policyholder had died during the term, beneficiaries would have received a payout, typically €30,000 to €50,000 for this type of contract. This dual structure is precisely the problem. It makes the product nearly impossible to evaluate, which is why consumer advocates repeatedly warn against these Kombi-Produkte (combination products).

The insurance component explains why you can’t simply compare the return to a pure investment product. But it doesn’t explain why the return is this bad. For that, you need to follow the money.

Where Your Contributions Actually Go

German insurance companies are legally required to provide a breakdown of costs, but these documents are deliberately complex. In a typical fondsgebundene Lebensversicherung, your annual premium gets sliced up immediately:

• Acquisition costs (Abschlusskosten): These can consume 3-5% of your total expected premiums upfront. For a €600/year policy over 17.5 years, that’s €315-525 paid in the first few years, regardless of actual investment performance. This compensates the agent or broker who sold you the policy.
• Administrative fees (Verwaltungskosten): Ongoing charges of 0.5-1% annually cover the insurer’s overhead. On a €10,500 balance, that’s €52-105 per year.
• Fund management fees: The underlying investment funds charge their own fees, typically 0.5-2% annually.
• Insurance costs (Risikokosten): The actual cost of the death benefit coverage, which increases as you age.
• Premium for guarantees: Many policies include a guarantee that you won’t lose your principal, which sounds reassuring but costs extra and forces conservative investment strategies.

By the time all these layers take their cut, the underlying fund would need exceptional performance just to break even. In the case of the €4.84 policy, the fund itself performed adequately, but fees consumed virtually all the gains. This isn’t an accident, it’s the business model.

The Cultural Context: Why Germans Keep Buying These

Understanding why these products persist requires looking at Germany’s unique financial psychology. For decades, Germans have been conditioned to distrust “risky” investments like stocks, preferring the perceived safety of insurance-based products. Banks and insurance companies, often part of the same financial group, have dominated the retail investment landscape, pushing these commission-heavy products through their branch networks.

The sales pitch is compelling, especially for expats struggling with German bureaucracy: “One product solves two problems. You get retirement savings and life insurance. It’s steuerlich günstig (tax-advantaged). You can’t lose money. And it’s German, safe and reliable.” What they don’t emphasize is that you’re paying premium prices for mediocre results.

This cultural preference for “safe” products explains why so few Germans invest directly in capital markets. Only about 17% of German adults own stocks directly, compared to over 60% in the US. Instead, billions flow into these insurance wrappers that promise security but deliver minimal growth. The recent increase in the Garantiezins from 0.25% to 1.0%, the first hike in 30 years, won’t help existing policyholders. It applies only to new contracts, while millions of old policies continue to languish.

The Insurance Illusion

Let’s address the death benefit argument head-on. Yes, these policies pay out if you die. But at what cost? A pure Risikolebensversicherung (term life insurance) providing €50,000 coverage for a healthy 35-year-old costs roughly €150-200 annually, one-third of what our case study paid. The remaining €400+ could have been invested efficiently elsewhere.

The insurance component in these hybrid products is notoriously expensive because it’s bundled with investment management you don’t need and guarantees you probably shouldn’t pay for. As one financial advisor bluntly stated, “Irgendwo von müssen ja die Glaspaläste der Versicherungen und üppigen Gehälter gezahlt werden”, the glass palaces and generous salaries have to be funded somehow.

Moreover, the death benefit often decreases over time as your investment portion grows, meaning you’re paying increasing insurance costs for shrinking coverage. It’s the worst of both worlds: expensive insurance and poor investment returns.

Regulatory Changes and Consumer Protection

In 2026, German life insurers are raising interest rates on new policies to an average of 2.7%, with the best offers reaching 3.5%. This modest improvement comes after years of pressure and reflects higher market rates. But it doesn’t address the fundamental structural problems.

The Bund der Versicherten (Federal Association of Insured Persons) has consistently ranked Kapitallebensversicherungen as the number one “unsinnige Versicherung” (pointless insurance). Their analysis shows that “intransparent and overpriced cost structures” often result in guaranteed benefits lower than total premiums paid. The Verbraucherzentrale Bayern (Bavarian Consumer Center) echoes this, noting that many daily-sold policies have questionable necessity.

The German government has finally recognized the problem, pushing reforms to make direct capital market investment more attractive. New Altersvorsorgedepot (retirement provision depot) options will allow tax-advantaged ETF investments, potentially bypassing insurance wrappers entirely. This threatens the traditional insurance business model, which explains their recent lobbying efforts.

Better Alternatives for Expat Investors

If you’re currently paying into one of these policies, what should you do? First, don’t panic-cancel. The upfront acquisition costs are already sunk, and early termination often means losing a significant portion of your accumulated value. Instead, request a detailed cost breakdown and performance analysis from your insurer. They must provide this.

For new investors, the path is clearer:

• Separate insurance from investment. Buy a pure Risikolebensversicherung for coverage needs, then invest separately through a low-cost ETF-Sparplan (ETF savings plan). Historical market returns average around 7% annually over long periods, dwarfing insurance product yields even after accounting for the Vorabpauschale (advance lump-sum tax).
• Consider a bAV (company pension plan) or Riester-Rente only if your employer contributes significantly or you qualify for state subsidies. Otherwise, the fees and restrictions often outweigh the benefits.
• Be skeptical of bank recommendations. German banks still push insurance products because commissions are lucrative. Their “advice” is often sales material. Independent financial advisors who charge transparent fees are a better bet, though they remain rare in Germany.

What If You’re Already Trapped?

For the estimated 84 million private pension and life insurance contracts in Germany, many holders feel stuck. You have options:

• Beitragsfreistellung (Premium suspension): Stop paying new premiums while keeping the insurance coverage and accumulated investment. This freezes the damage.
• Verkauf (Sale): Some policies can be sold on secondary markets, though you’ll receive less than the theoretical value.
• Kündigung (Cancellation): Accept the loss, withdraw your diminished capital, and reinvest it properly. The break-even calculation depends on how much you’ve already paid in acquisition costs.

The psychological barrier is significant. Many Germans view canceling an insurance policy as irresponsible, a testament to how deeply the industry has shaped financial thinking. But mathematically, continuing to pour money into a product with a 0.05% return is the truly irresponsible choice.

The Bigger Picture

This scandal isn’t about one bad product or one naive consumer. It reveals a systemic issue in German retail finance: a preference for complex, opaque products sold through commission-based distribution channels. While younger Germans are finally embracing ETFs and direct investing, millions of older residents, and unsuspecting expats, remain locked in these underperforming contracts.

The €4.84 return is extreme but not unique. Industry data suggests that fondsgebundene Lebensversicherungen sold in the 2000s have delivered average annual returns below 1% after fees, negative in real terms after inflation. Yet they remain widely held because the German financial system makes it easier to buy these products than to understand their true costs.

As an expat, you’re particularly vulnerable. The language barrier, unfamiliarity with German financial culture, and trust in established institutions create perfect conditions for being sold these products. The salesperson might be friendly, the brochures professional, and the promises reassuring. But the math doesn’t lie.

Clear Takeaways

1. Never combine insurance and investment. These are separate needs requiring separate products. The convenience of a combo costs you thousands.

2. Demand a complete fee breakdown. German insurers must disclose all costs. If you don’t understand the document, that’s a red flag.

3. Calculate your real return. Subtract all fees and compare to inflation. Many policies lose money in real terms.

4. Consider the alternative: A €200/year term life policy + €400/year in ETFs would likely have turned our case study’s €10,500 into €15,000-20,000 over 17.5 years, while providing better insurance coverage.

5. Act on existing policies. Don’t let the sunk cost fallacy trap you further. Get advice from a fee-only advisor (Honorarberater) about whether to suspend, sell, or cancel.