What banks and life insurance companies do with your money – more transparency with real estate
Do you have a checking account or have your money invested in life insurance? If so, do you know what banks and life insurers do with your money? In fact, it's not that easy to find out exactly what the institutions where you park or invest your money are doing with your savings. We have researched for you and put together some facts to answer the question.
How banks and insurers “work”
Your checking account basically works very simply: money is deposited and you can withdraw it at any time. But what happens to your money in the meantime? It definitely won't end up in the bank's safe. Because banks work with the money that is available to them. The same applies to insurance companies that make investments with premiums and contributions. The goal: achieve the highest possible profits.
Profits are necessary
The fact that banks and insurers want to make profits is not reprehensible and completely normal. Because the same rules apply to them as to all companies. The profits are needed to fulfill obligations to customers, meet ongoing costs or make investments. The difference is that the institutes only work to a small extent with their own money. Rather, the customers' capital is used.
How do banks and insurers make their money?
A source of income for banks and insurance companies are fees, premiums and contributions from customers. However, the profits from interest transactions make up the much larger share. These arise from investments in different areas.
Interest profits are melting away
In recent years, banks and life insurers have come under increasing pressure when it comes to interest rate transactions. Because interest rates plummeted, especially for the once safe and high-interest forms of investment. For life insurers, for example, the net interest on investments fell from 4.2 percent in 2015 to just 2.2 percent in 2022. This means that for some life insurance policies, the interest profits no longer even cover the costs of the contracts. So customers' capital decreases instead of increasing. In order to compensate for the slump in safe forms of investment, insurers and banks have increasingly switched to investing in companies. Find out what this means for your money below. But first, let's take a look at the areas in which banks and life insurance companies invest their money.
Where do banks and life insurance companies invest their money?
One of the main businesses of banks is issuing loans to private and commercial customers. And insurers also grant loans, but to a lesser extent. In addition, banks and insurers invest in almost all forms of investment available on the capital market. In the following paragraphs we will briefly introduce some types of investments.
Fixed income investments: bonds, loans and securities
An important area is investments in so-called “safe investments”. These include the products grouped under pensions, such as mortgages, loans, bearer bonds and other fixed-interest securities. These include, among other things, corporate bonds, Pfandbriefe as well as federal and state bonds. These make up by far the largest share of investments, at least when it comes to life insurance. The forms of investment are characterized by a relatively high level of security, but also comparatively low returns.
Stocks and company investments
Due to the dwindling interest profits on safe forms of investment over the past decade, investments by banks and life insurers in stocks and other company investments have become increasingly important. The share of both forms of investment in life insurers' total investments in 2015 was only 6.7 percent. In 2022 the proportion was almost 16 percent. In principle, there is nothing that speaks against banks and life insurers investing in companies. The investments are generally quite safe and offer very good return opportunities.
Dangers of corporate investments
However, it is important to take a close look at what companies do with the capital made available by banks and life insurers. There is a risk here that you as a customer will end up using your paid-in capital to support companies and lines of business that you do not want to support. This can lead to co-financing of human rights violations, armaments, fossil fuels or even speculative transactions with food – without this being obvious at first glance. It often still remains to be found out which companies banks and insurers invest in. However, since the companies' investment structures are usually complicated and opaque, tracking is difficult or even impossible. The FairFinanzeGuide initiative provides an initial assessment of which banks and life insurers work fairly and sustainably.
Tangible assets are not very suitable for banks and insurance companies
In order to have clarity about your own investments, it is a good idea to invest in tangible assets yourself. These are much more transparent. As a rule, you receive a real object for the capital you invest. Here it is clear what you are using your money for, because you can see and touch the asset and can be sure that it actually exists. Banks and insurers use this form of investment rather rudimentarily due to the administrative effort and the high level of capital tied up. There is a wide selection of material assets available: from precious metals such as gold and silver to expensive wines, antiques and vintage cars to real estate.
property
Investing in a property is absolutely transparent. The central anchor of our strategy for secure wealth creation is easy to understand from day one. Because your money flows directly and exclusively into a visible, fixed asset. This stands for secure wealth accumulation: On the one hand, there is a good chance that the value of a property will increase over time – especially in regions with high demand. On the other hand, a rented property offers permanent rental income, i.e. passive income. You can find out more about real estate as an investment in our article “Apartment as an investment: What you need to consider”. Banks and insurers often only have small real estate portfolios because they require a lot of capital to be tied up.
Conclusion: Banks and life insurers mostly invest perfectly – with one exception
Overall, it can be seen that the vast majority of the capital that customers leave to banks and insurers is properly invested. Only the area of corporate investments, which has become increasingly important, poses risks. Your own money can certainly be used for purposes that go against your own beliefs and moral ideas.
Tip 1: Look carefully when investing
In order to protect your own money and your own interests, you need to pay close attention to investments. Find out more about your financial products in detail. Please study the contract terms carefully and seek independent advice if necessary. Our financial experts at the DFK Group will be happy to provide you with such advice. As part of our free initial consultation with our financial compass, we not only examine your expenses, but also your investment products to see whether they are suitable for achieving your financial goals.
Tip 2: Integrate tangible assets into your investment strategy
Tangible assets offer the highest degree of transparency. Since very attractive returns are possible, especially with real estate, you should consider this form of investment for yourself. We have developed a high level of expertise in the field of real estate over the past decades. For us, real estate is one of three strong pillars for secure and attractive retirement provision, alongside a high-interest investment and a liquidity reserve. Get to know our concept and arrange a non-binding consultation appointment now.
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