Assurance-Vie: An Annuity is not Life Insurance

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Assurance VieQUESTION:

Could you give me some enlightenment about assurance-vie plans in France that are sold through the banks and that are linked to the stock markets. I do not understand what they are, since they are clearly not life insurance policies even though that is the exact translation. For about two years now, their performance has not been what many people expected. Because of that, many are in a difficult financial position (some are aware of this, others are not).

I have lived in France for several decades, but as an American I am outraged by the responses I get from the banks, taking no responsibility for the “advice” or lack of advice relative to the stock market. I thought that the client had a contract with them and they were obliged to guarantee that the financial plan would fulfill its goals. Is there any recourse against those crooks?

ANSWER:

I need to explain the words used here before addressing the issue you have raised. An insurance policy is always an agreement in which you pay a sum of money to an insurer to be protected against a possible occurrence, one that is not certain and cannot be anticipated. When you insure a car, it is against the damage it can cause to other vehicles and to people. But accidents as such are never certain and cannot be anticipated. Human health can be insured, since illness and accident cannot be predicted (leaving aside chronic diseases and pre-existing conditions, which are not the topic). Furthermore, while it is true that all human beings eventually die, the exact moment and circumstances are never known in advance, even though modern medicine reduces the uncertainty some-what.

So, while the most common insurance related to human death is called “life insurance,” technically it should be called “death insurance,” since the risk covered is death and the proceeds are paid not to the person insured but to a beneficiary mentioned in the policy. In French, the name of this type of policy reflects its nature: it is called “assurance décès.”

There is another type of policy, much more common in France than in the USA, called assurance-vie. It covers the risk of outliving one’s means. In the USA this kind of contract is called an annuity. The way it works is that the insured invests money, regularly or not, for a certain period. Then, on the termination date of the policy, the money held by the insurer is released, often at regular intervals (such as monthly), either for the rest of the insured’s life or with other conditions.

In the USA, such products are generally retirement accounts – IRAs, 401Ks, and so on. In France, the main requirement is that the money is locked in for at least eight years.

The bottom line is that these products are simply a plan to build up principal for retirement. The real issue is where the money is invested. But that is an issue not just for annuities or assurance-vie; it is something you have to consider every time you put your money anywhere besides a checking account.

Thus, assurance-vie, as a product does not deserve the kind of harsh criticism you are making. Take an example from the American market: would you criticize mutual funds in general because the one you invested in holds futures contracts as an investment? Such funds could lose all their money, leaving you with nothing, but nobody forced you to choose this kind of investment. By the way, this is why American retirement accounts are limited as to the nature of investments they can make and the amount that can be invested in certain products. The degree of risk has to be limited mainly because when retirement age arrives the accounts are supposed to contain at least the amount of the original investment, and hopefully more.

So, to the extent that your outrage is warranted, it applies to France and the USA alike, and probably the rest of the world for that matter. The entire financial industry has one goal: finding the stock, bond, contract, art work, vintage car, piece of real estate, etc., whose value will increase to produce a profit. I would never exonerate this industry of its responsibility to advise investors, but it is your money and you should know what you are purchasing when you invest in a mutual fund. There are safe investments, such as US Treasury bonds, on which the returns are quite low. There are risky investments, such as futures contracts, where the returns – or losses – can be quite impressive.

Sorry to sound harsh, but investing mainly, if not solely, in the stock market with this kind of product is mind-boggling. It is in many ways a contradiction in terms. Since the 2008 crisis, stock markets worldwide have all lost considerable amounts of money. Some are catching up quickly while others are still trailing. But assurance-vie is by definition supposed to be a long-term investment. If you were worried about a fall in the market lasting a couple of years, compared to the overall duration of the contract, then you were not ready to invest in the stock market. You should have said NO when the banker proposed this mutual fund, and he would have proposed another.

You should not underestimate your own responsibility in this choice. If you are afraid of fast cars, you do not buy a Corvette or a Porsche. That may not be the best comparison, but I want to make my point clear. Having sold these kinds of product in the USA for several years, I know first hand the methods used to convince people to buy them, and I admit that the car analogy is flawed, since the general public has little knowledge of complicated financial products while nearly everybody above the age of 10 has some interest in cars for one reason or another.

I fully understand and respect your anger, and your feeling that you have been not just misled but tricked into signing up to buy something that was probably not for you. Having this happen in a foreign country may have made the matter seem even worse. But the worst thing you can do is cancel the plan, since you would incur fees and taxes. Probably the best thing you can do is educate yourself sufficiently to understand the banker’s advice better, then shift your investment to other types of investments over a rather long period to minimize your losses.

To conclude, I would like to single out one of your comments: “I thought that the client had a contract with them and they were obliged to guarantee that the financial plan will fulfill its goals.”

This issue is very much black and white. If the document you signed – which is a contract, in every sense of the word – states that you are guaranteed a certain rate of return, then YES you are fully entitled to it. But in my experience, such products are rare and the guaranteed rates are quite low. The vast majority of investment plans show what the product is potentially worth, using past performance data. Then, in small or large print, depending on the company, there will be words to this effect: “the fund’s past performance (before and after taxes) does not indicate how the fund will perform in the future.”

That says it all. The return you were hoping for was not contractual the way you thought it was.

 

 

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