The essence of the scheme is that with a normal loan, we pay the bank interest and repayments every month, so that at first the debt is slowly and then rapidly reduced until the end of the term. This is the essence of an annuity loan, as you can see in the diagram below.
Because you are running out of capital, you are paying less and less interest on your falling debt, so the monthly repayment rate can be higher. (The monthly repayment consists of the principal repayment and interest, but the rate varies from month to month.)
annuity loan capital and interest
This is not the case with combined loans. There, you do not pay back any capital to the bank during the life of the combined product, but collect this outstanding capital debt into a home savings or life insurance policy. (I’ve already written about a home loan combined here.)
Thus, your capital debt to the bank will not decrease by a penny in the first 10 years, so the interest payable to the bank at the end of the 10th year will be exactly the same as in the first month.
Once the money has accumulated in life insurance, it will be repaid at the end of the 10th year and from there will be a standard loan from the combined loan.
Loans combined with such life insurance are a big suck, for two reasons. One is the gross cost of life insurance, only the initial cost takes the first and a half years to pay up and beyond that there are ongoing costs (5% of each payment, account management fee, etc.). And with that burden, it’s hard to be a plus. (I’ve written a lot about this, here and here last, read, I won’t go into that much now.)
Very serious problem is that not only the costs absorb our capital
But also how much our investment will bring is not guaranteed.
Since the bank charges its interest on outstanding capital each year (now 8.2% CHF), if you do not want to fail, unit link insurance must produce this and even the costs that another average of 7-10% (see also TKM), that is, every year, when our unit-linked insurance does not yield a gross return of 15.2-18.2%, we are in serious failure.
And that is what a unit-linked insurance brings in just the imagination of agents, and in recent years we have typically had a 3% annual return on such insurance. (See also the two links above for yields.)
With that in mind, it seems like a good decision to take out life insurance and ask the bank to convert your combined loan into a traditional loan.
So this is the money we found
The question is, do we fail more in maintaining unit-linked insurance than we gain on the exchange rate barrier?
Let’s look at an example. At today’s exchange rate, HUF 20 million combined life insurance loan, based on CHF, interest rate 8.2%, maturity 20 years. The monthly interest payable to the bank is HUF 137,000, and the insurance goes to HUF 32,800 per month.
If the exchange rate of the Swiss franc stays at $ 230 and we pay the bank $ 107,212 at a virtual exchange rate of 180, we win almost $ 30,000 a month compared to the original lineup.
This almost covers the amount we put into unit linked insurance every month. That is, the state and the bank pay the fee for us.
Therefore, it is worth entering the exchange rate barrier and not terminating life insurance during the term.
What fund should we use to collect money in unit linked insurance?
As we have seen, the performance of unit linked insurance is completely unpredictable. There is nothing to stop us from exiting a Brazilian or Chinese fund by half at maturity, as we expected.
Therefore, it is worth transferring money to a money market fund or a government securities fund. They are both unfortunate and they do not reach the interest paid to the bank even before deducting the costs, but at least their profits can be calculated.