ETF as an insurance product to avoid capital gains taxes?

[blessedheart]

My bank in Austria is offering an "ETF as insurance product" which appears to be a retirement-fund scheme (i.e. either lump sum payment or monthly pension after a certain date) with included insurance for invalidity.

Anyhow, it has a running cost of 8% for 5 years which drops to 2% after 5 years, but monthly premium can only be doubled from the initially set amount. The projection is that over a hypothetical runtime of 30 years, 90.3% of the premium will be invested and 9.7% should be some cost or another. The appeal appears to be that this ~10% includes a 4% insurance tax which is the only tax that will be asked for this in Austria. The driving funds for this product can be chosen (and choices include MSCI all world at 0.2% transaction cost) and split amongst multiple ETFs (or actively managed funds if one was so inclined).

My question is now: for a runtime of ca 30 years, is this competitive against the same ETF which will incur taxes of 27.5% on capital gains at the time of selling?

Thank you!

 

[laarni]

@blessedheart In most cases, a product that mixes insurance and investment is only good for the bank that sells it and not good for you. Don't get blinded by tax savings, you usually pay a multiple of that savings in fees for the product instead.

It can only be worthwhile if the yearly fees for the product are very low. 2% yearly is not low when a simple World ETF is at 0.2% or less.

 

[giilife]

@blessedheart Bank fees are compounding where as capital gains are paid once at the end (and pro rated to what you actually use).

 

[blessedheart]

@giilife that makes sense, but i am struggling a bit with the math.

assuming the information is correct and 10% over the lifetime are paid in taxes and fees, is it not correct to assume that this just means i am investing 90% in a monthly scheme? my back of the envelope calculations gives an edge to investing say 90€ * 12 months * 30 years at 5% annual growth as compared to investing 100€ and then paying taxes on the gains.

 

[compassionate_rn]

@blessedheart 8% for the first 5 years is huge. 2% per year after that is still a big fee.

Make sure you check the fine print and understand the contract fully before committing.

They're almost guaranteed to be a ripoff compared to investing yourself in the same funds/ETFs, otherwise they wouldn't make money selling them.

If you don't need the insurance and wouldn't have gotten otherwise then that's money you throw away that you could have invested instead.

Think about it like this: if the taxes are ~10% that means you're only investing 90% of what you could.

Over time that compounds, you can do a calculation over 30 years and compare them. But I have a feeling that the scenarion in which you invest 100 instead of 90 will be so much bigger that even after taxes it's more.

 

[giilife]

@blessedheart Let me try to illustrate it to you in a case where in 30 years the market returns exactly 0%. You start with 100,000. In 5 years of 8% fees you are down to 66,942 in the next 25 of 2% you are down to 40,585. In case of a cheapest ETF 0.03% I could find if you start with 100,000 you are left with 99,104 after 30 years, then you pay you capital gains tax on gains in a total of 0. You are giving those leeches 60% of your money because you are afraid of the government's 25% exit fee. This gets a lot worse if market goes down during initial 5 years, which is rather likely. The bank fees are not on the money you put in, it's on the whole pot each year, every year.

 

[blessedheart]

@giilife thank you, that was helpful; i thought the 8% would come off of the monthly rate but of course it will be on the whole pot, that changes it quite a bit.

 

[rhemajoy]

@blessedheart TL;DR, no. With the fees you describe, you'll likely be far better off with an ETF in a brokerage account, even with the capital gains tax.

You see this a lot in the "expat" life insurance market where 'advisors' will sell life insurance with similar fee structures. In general, they come with massive early exit penalties so even if you wanted to get out before the term, it would cost you dearly.

Crucially you're likely missing out on the first 5 years of compounding as that 8% aligns closely with the average rate of return for many global stock indexes. So assume you put in 500 EUR a month for the first 5 years, that's ~37,000 EUR in gains that goes directly to the insurance fund.

Over time, that's even worse. That 37,000 EUR left alone (without further contribution) will come out to ~250,000 EUR 25 years later (assuming the 8% return). That's money you'll never see since the bank has effectively kept that for themselves.

During the remaining 25 years, the bank will also take 2% of what you invest for themselves, which is an additional ~195,000 EUR in gains they make instead of you. Already with this structure, you're missing out on ~445,000 EUR compared to the ETF.

What about the taxes?

A 27.5% CGT might be painful, but if you were to invest that same 500 EUR a month for 30 year at a theoretical 8%, you'd earn ~745,000 EUR.

After CGT (assuming you sold all at once), you'd come out with 540,000 EUR or a tax bill of ~205,000 EUR. That alone is less than the fees you'd pay to the bank for their insurance product.

On that, for "guaranteed" income, you could consider selling fractions of your portfolio each year then growing that amount back over the following 12 months. Using the 4% rule, your ~745,000 EUR would net you ~1,800 EUR per month for life after taxes.

Of course these are all hypothetical numbers. Returns will vary each year. If the insurance product underperforms that 8%, you won't gain anything. The more you invest (so if you double your contribution), the starker the impacts of fees become.

While you should probably check this with a local advisor, the numbers seem to suggest the ETF and capital gains tax are the better option, even if it's higher on paper than the insurance product.

Hope this clarifies!

 

[blessedheart]

@rhemajoy thank you, this was super helpful!

 

[rhemajoy]

@blessedheart You're welcome!