Camille Van Vyve
17 Oct 2023
ETFs vs. Branch 23: which is the better investment option?
In Belgium, insurers often advertise Branch 23 (also called Class 23 or unit-linked insurance) as an interesting long-term investment for savers and investors. No withholding tax or stock exchange tax – what a boon! But don't rush headlong into it: the entry and management fees associated with this type of product are generally substantial, making Branch 23 far less attractive than it may seem. Let's dive into the numbers in this blog!
What is Branch 23 all about?
A Branch 23 product is an investment portfolio housed within a life insurance contract, providing certain tax advantages. The return on this life insurance depends on the performance of the underlying investment, meaning it's not guaranteed. The risk of loss due to market fluctuations is entirely supported by the policyholder.
Who is Branch 23 for?
Branch 23 caters to long-term investors looking to maximize returns in exchange for a certain level of risk. This sets it apart from Branch 21, a life insurance policy that offers guaranteed capital and generally modest returns.
Advantages of Branch 23
Compared to a traditional investment through a simple securities account, insurers often highlight the favorable tax treatment of Branch 23, including:
- No withholding tax (30% on interest and dividends in a conventional investment).
- No stock exchange transaction tax (0,12% for each transaction in a conventional investment).
Disadvantages of Branch 23
However, what insurers often overlook are the numerous fees associated with such contracts, which can be substantial. In reality, in the long term, these fees completely negate the advantages mentioned above, significantly reducing the expected return on the life insurance. The list of these fees is extensive:
- A 2% legal tax on each premium (in the context of a long-term investment, it will likely be a one-time premium).
- Entry fees on each premium, which vary from one contract to another.
- Contract fees, typically ranging from 0,5% to 1% annually.
- Management fees, generally between 1,5% and 2,5% annually.
- Exit fees, which also vary depending on the contract.
ETF investment minimizes fees
Conversely, index investing through ETFs helps minimize the fees incurred by investors. As the name suggests, an exchange-traded fund (ETF) replicates the performance of a stock index at all times. This means there is no need for regular transactions (buying or selling), reducing the tax on stock exchange transactions to a minimum. Additionally, Easyvest's portfolios are invested in capitalization ETFs, which means that dividends are systematically reinvested and therefore not subject to withholding tax. At the end, the capital gain on stocks won't be taxed, but a 30% tax (known as the "Reynders tax") will be applied to bond gains.
Substantial missed opportunities
Based on our hypotheses, taking into account taxation and fees, for €100.000 invested over 30 years, the accumulated capital in Branch 23 will be €380.000 compared to €638.000 through index investing! This significant difference can certainly make a crucial impact when it comes to retirement planning or leaving a legacy to your descendants. The lesson here is not to be blinded by favorable taxation and to be fully aware of the applied fees before signing a Branch 23 contract.
Contract duration
It's not just about costs. Branch 23 life insurance contracts may have a fixed term or not. In any case, the rule is that the insurer pays when the policyholder passes away. Unlike Branch 21, the return on Branch 23 investment insurance is exempt from withholding tax, regardless of when you withdraw the capital. However, in the event of an early sale, you will be liable for exit fees which may be significant. In contrast, a regular securities account can be liquidated at any time, and Easyvest does not charge exit fees.
Designating a beneficiary
Since Branch 23 products are insurance contracts, it is possible to designate a beneficiary, who can be the policyholder, their spouse, children, or a third party. However, a regular securities account can also be opened without any issue in joint ownership, in the name of a spouse or a minor child, for example. If this financial donation is accompanied by a specific side agreement detailing the terms of it, similar succession objectives to those of a life insurance policy can be achieved.
ETF Investment seems more profitable and flexible than Branch 23
As our model demonstrates, investing in ETFs as recommended by Easyvest, through a simple securities account, looks significantly more advantageous in the long term than a Branch 23 life insurance contract, despite the tax benefits of the latter. Furthermore, this type of investment is more flexible, as a securities account can be liquidated at any time and without fees at Easyvest. You can also open it in the name of your spouse or children if the goal is to financially protect them in case of your passing. Our advisors are available for transparent discussions about these various scenarios!