Insurance companies are not normally the first port of call for prospective borrowers looking for loans. As a general rule, taking out permanent life insurance – such as mixed life insurance – is more expensive than taking out a term life insurance policy and saving using savings accounts. For this reason, you should proceed with caution when taking out permanent life insurance in Switzerland. But if you already hold a life insurance policy which has a cash value or if taking out this type of life insurance makes sense in your specific situation, then it is worth noting that most Swiss insurers will give you loans secured by your policy’s cash value. This can be advantageous compared to getting a personal loan.
What is a policy loan?
Policy loans are typically open-ended loans secured by the cash value of permanent life insurance policies. A portion of the premiums which you pay for whole life insurance are used to cover the actual, ongoing cost of life insurance. Another portion is used to build your equity – the cash value of your life insurance policy. The cash value builds up as you pay premiums, and over time it offsets the face value of the policy so that you share the cost of the benefit which you receive when the policy matures (when you die or reach a predetermined age). That cash value is your “property” until the policy matures. Insurance providers generally pay interest or dividends on cash value. If you surrender your policy before it matures, the insurer generally pays out its cash value.
Because the cash value of a life insurance policy is technically your property, you can use it as collateral in order to get secured loans. You do not actually borrow the money making up your cash value, but simply pledge it as collateral which the lender can claim if you are not able to meet your interest payment obligations.
How can you get a policy loan in Switzerland?
Swiss life insurance providers including Helvetia, Allianz Suisse, Swiss Life, Zurich, PAX and Vaudoise offer policy loans secured by the cash value of life insurance policies which they issue. In addition to direct policy loans from insurance providers, specialized policy loans are also offered by some Swiss banks. Other banks may accept life insurance policy pledges as collateral against personal loans or lombard loans even if they do not offer specialized policy loans.
Whether you get a policy loan directly from your insurance provider or from a third-party lender, you pledge the cash value of your life insurance policy to the lender as collateral which they can claim if you fail to service your loan as per the loan agreement. It is important to note that although policy loans are secured, insurance providers and lenders still reserve the right to deny applications. If your creditworthiness is very poor, for example, insurance providers may have doubts as to your ability to pay interest on the loan.
Typically, insurance providers do not provide loans equal to the full cash value of your policy, but only up to certain limits. For example, holders of the Helvetia Value Trend policy can get loans worth up to 80% of their cash value. The Obwaldner Kantonalbank provides policy loans worth up to 90% of cash value.
Which life insurance policies are eligible?
In Switzerland, life insurance policies generally make use of either the 3b (private retirement savings), 3a (restricted private retirement savings) or 2a (vested benefits) retirement saving categories. Only life insurance policies which fall under the Swiss 3b category of retirement savings can be used to obtain policy loans.
Life insurance policies based on the 3a and 2a (vested benefits) retirement-savings categories are not normally eligible because access to their cash value is restricted. However, 2a and 3a life insurance policies can generally be pledged as collateral against loans for the purchase of homes used as primary residences or as part of down payments on mortgages within the limitations applicable to the 2a and 3a categories of retirement savings.
What are the advantages of policy loans?
1. The interest rates charged for policy loans are typically lower than those charged for unsecured personal loans. This is because policy loans are completely secured by the collateral provided by your policy’s cash value. As per January 2018, the Obwaldner Kantonalbank charges 2.75%, Helvetia charges 3% and Generali charges 3.5% variable interest per annum on policy loans. You can find current personal loan interest rates using the moneyland.ch personal loan comparison.
2. Unlike personal loans, policy loans are not normally amortizing loans. Unless otherwise stipulated in the loan agreement, you do not normally need to repay the loan within a specific time frame. You can pay off all or part of the loan whenever it suits you at any point until the policy matures, at which point the outstanding debt will be deducted from the insurance benefit indicated by the policy’s face value.
3. Policy loans also provide a way to access the capital tied up in your life insurance policy for other investments or to bridge financial gaps without surrendering your policy and losing your insurance coverage.
4. If you are temporarily unable to meet your life insurance premiums and risk a forced surrender of your policy, a policy loan can be used as a last resort to bridge the gap and avoid forfeiting the insurance benefit.
5. You continue to earn interest on your policy’s cash value after taking out a policy loan because you do not withdraw the money or put it on hold but simply pledge it as collateral. Although the debit interest which you pay for your policy loan is generally higher than the credit interest which you earn on your cash value, the credit interest earned helps to offset the cost of the loan.
What are the disadvantages of policy loans?
1. Unlike the interest rates of personal loans, which remain the same over the life of the loan, policy loans typically have variable annual interest rates. This means that the insurance company or bank may raise (or lower) your interest rate on an ongoing basis, making the total cost of the loan difficult to calculate in advance.
2. You pay interest on the outstanding debt until it is fully repaid. Interest is charged on a monthly, quarterly, semi-annual or annual basis (depending on the lender and loan agreement). The longer you wait to repay the loan, the more interest you will pay, so amortizing the loan as soon as possible is recommended. If at any point your policy’s cash value no longer covers the amount owed (due to failure to meet interest payments, for example), the insurance provider reserves the right to force you to surrender your policy and forfeit the insurance benefit.
3. If the loan is not repaid, the loan principal – along with any outstanding interest charges and incidental fees – are deducted from your death benefit or living benefit (the money which is paid out by the insurance company when you die or reach a specific age. This reduces the benefit. In Switzerland, permanent life insurance benefits are tax free as long as certain conditions are met.
4. Putting your policy on hold or surrendering it relieves you of your obligation to pay premiums. Getting a policy loan, on the other hand, does not affect premiums. After getting a policy loan, you will still have to pay your premiums in full and on time – and you will have to pay interest on the loan as well. If you take out a policy loan as a temporary measure to cover your life insurance premiums, make sure to use the loan for that purpose only. If you do not expect to repay the loan in full within a short timeframe, take time to calculate the full cost of the loan. In some cases, a policy loan held over a long term and left unamortized until the policy matures could reduce the death benefit by as much (or more) than putting your policy on hold.
When does getting a policy loan make sense?
Policy loans provide a means of accessing capital at relatively low interest rates. Like other loans, the longer you service a policy loan, the more it costs you. Ideally, you should only use policy loans for short-term financing which you are able to repay within a short period of time. Using a policy loan can also make sense if you have unsecured debt which must be repaid to prevent default and subsequent damage to your creditworthiness. It can also provide a solution for refinancing more expensive debt, such as credit card debt and personal loans with high interest rates.
If you are unable to meet your premium payments and are looking for a solution, putting your policy on hold may be preferable to getting a policy loan. You do not need to pay premiums while your life insurance policy is on hold. Your policy’s face value will be reduced to match the premiums paid up until the point that you put it on hold, so your life insurance coverage will be lower while the policy is on hold. You can take it off hold as soon as you are able to pay your premiums, including the backlog of premiums owed and possible interest charges on that backlog. Doing this restores your original life insurance.
Surrendering your policy is only recommended if you desperately need to access a large amount of capital (to pay off debt, for example) and cannot afford to pay interest for a policy loan. When you surrender your policy, you forfeit the insurance benefit and only receive your cash value – normally a fraction of the amount you spent on life insurance premiums.
In some cases, getting a personal loan might be preferable to getting a policy loan. This is especially true if you find it difficult to discipline yourself to make steady loan repayments because personal loans must be amortized throughout a definite loan term. Amortizing a loan and making interest payments in steady installments throughout its life greatly reduces its cost in comparison to repaying the loan and paying interest due at the end of its life (when your policy, for example). You can use the moneyland.ch outstanding debt and early loan settlement calculator to calculate the effects of early repayment of loans.
If you own real estate, getting a mortgage can work out cheaper than getting a policy loan (which is effectively mortgaging your life insurance policy) because in Switzerland, mortgages let you access capital at very favorable interest rates. You can use the interactive moneyland.ch mortgage comparison to get an overview of mortgage interest rates.