Many Swiss insurance companies offer permanent life insurance policies based on either the 3a or 3b categories of private retirement savings. Permanent life insurance policies based on vested benefits (2a) are also available.
What is permanent life insurance?
Permanent life insurance is different to term life insurance in that the premiums which you pay build equity (known as cash value) in your policy. The permanent life insurance category covers a number of sub-categories including whole life insurance which insures you for life and savings insurance varieties which mature and pay out a benefit at a point in time ahead of your death (when you reach retirement age, for example).
In the case of whole life insurance, the cash value builds up so that the longer you live, the more of your risk of death you carry yourself and the less risk is borne by the insurance provider. This allows insurers to provide life insurance which covers you for your entire life – which is not possible with term life insurance.
In Switzerland, both whole life insurance and retirement-saving life insurance are offered. The latter is often referred to as mixed life insurance because it combines term life insurance with a retirement savings tool. The policy covers you until it matures when you reach a specific age (normally retirement age) or after a predetermined number of years. If you die before that point in time, your beneficiaries receive the death benefit defined by your policy's face value – as with term life insurance. But the difference is that if you do not die before your policy matures, you still receive the benefit because the extra money which you have paid in premiums has built your equity to the point that your policy's cash value covers its benefit. Some policies allow you to pay additional premiums to increase the cash value of your policy and subsequently the benefit you receive when the policy matures.
Contributing to a 3a or 3b mixed life insurance policy is very much like placing your money in a 3a or 3b retirement savings account and taking out a 3a or 3b term life insurance policy to protect against the risk of death until you retire.
Costs of permanent life insurance
The premiums which you pay for permanent life insurance must cover the premium for term life insurance and additional administrative fees for the management of your permanent life insurance policy. The portion of the premiums you pay which is left over after those two costs have been covered builds the policy’s cash value. The administrative fee makes up the additional cost of permanent life insurance over term life insurance. If you simply want to save for retirement while at the same time protecting your dependents against the financial risks of your possible death until you retire, then taking out term life insurance and using 3a retirement savings accounts to save for retirement generally works out cheaper than using permanent life insurance. You can use the term life insurance comparison to find the lowest premiums and the 3a retirement account comparison and vested benefits account comparison to find the highest-yield savings accounts.
Interest and dividends
Life insurance companies pay you interest on the cash value of your policy. This is normally applied to your insurance premiums, though it may be paid out in some cases. Rates vary between insurance providers. Insurance companies may also distribute dividends to permanent life insurance policy holders when they make profits, much like corporations distribute dividends to their shareholders. Typically, dividends are applied towards your insurance premiums, though they may also be paid directly to you as the policyholder. Although insurers often advertise “anticipated premiums” based on target dividends, there is no guarantee that you will receive any dividends at all, as dividend distributions only occur in years when the insurance provider makes a strong profit. Always use the real, non-discounted premium when calculating the cost of a policy.
3a, 3b and 2a policies
Premiums paid for permanent life insurance policies based on the 3a category of retirement savings can be deducted from taxable income in combination with other 3a savings, up to the annual 3a tax deduction limits. The cash value of 3a policies is not subject to wealth tax. The disadvantage of 3a policies is that beneficiaries must be selected in keeping with Swiss inheritance rules, so you are limited in who you can name as the beneficiary.
Premiums paid for 3b policies are not tax-deductible. The cash value of 3b policies is subject to wealth tax. However, 3b policies provide more flexibility in that you can name any beneficiary you choose.
Vested benefits life insurance policies fall under the 2a category of retirement savings, and are subject to all the restrictions which apply to vested benefits accounts. If you become employed again after taking out a vested benefits policy, you will have to surrender the policy and transfer its cash value to your new employer’s pension fund. This will generally result in a loss for you as the policyholder (more information below). For this reason, vested benefits policies are not well-suited to holding vested benefits over the short term, but rather as a final solution (when you move from Switzerland to an EU/EFTA member country and cannot take your benefits with you, for example).
Permanent life insurance and taxes in Switzerland
In Switzerland, tax laws vary between cantons and even municipalities. However, these rules generally apply to permanent life insurance policies.
Interest and dividends earned are tax free (cantonal and federal tax) as long as the policy is taken out before you turn 67, held for a minimum of 5 years (10 years in the case of policies linked to investment funds) and cashed out after you turn 60 years old.
If you buy a permanent life insurance policy using a single, lump-sum premium, you have to pay a stamp duty equal to 2.5% of the premium you pay. This stamp duty may also be applied to policies paid for by recurring premiums if the difference between the highest and lowest premium paid during the first 5 years (10 years for fund-based policies) is greater than 20%. To avoid paying stamp tax, it is important that you do not make large additional contributions above your standard premium during that time, and that you pay for your policy using a steady, regular premium.
In the case of 3b permanent life insurance policies, the benefit paid out may be tax-free provided certain conditions are met (Article 24, section b of the Swiss federal law governing federal income tax). The benefit paid out by a 3a or 2a permanent life insurance policy when the policy matures is taxed separately from other income at a special, low rate.
Risks of permanent life insurance
A permanent life insurance policy is a long-term commitment, and normally a lifelong commitment in the case of whole life insurance. It can be very difficult to predict how your financial situation will develop over several decades, and whether or not you will still be able to afford insurance premiums in the distant future. If you are unable to pay your premiums at some point, you will have to either place your policy on hold or surrender it to the insurance company. Placing it on hold relieves you of your obligation to pay premiums. The death benefit is reduced in relation to the number of premium payments made. Having your policy put on hold is preferable to surrendering it because you remain covered – albeit with a lower face value.
When you surrender your policy, the insurance company pays you the cash value. You lose the death benefit that you paid for, and you lose the money spent on the administrative fees. Important: Insurance providers generally use the premiums you pay in your first years as a policyholder to cover all of the administrative costs and term life insurance premiums up front. Only after these have been covered do the bulk of your premiums directly build the cash value. If you surrender your policy in the first half of the insurance term, you will receive very little compensation because the cash value will be low or even non-existent.
Using permanent life insurance as collateral for loans
The cash value of permanent life insurance policies can be pledged towards down-payments on mortgages. You can also pledge the cash value of life insurance policies as collateral in order to obtain policy loans from your life insurance provider or a third-party bank.
While permanent life insurance policies are the tool of choice for retirement saving in some countries, most people will not benefit from using this type of life insurance in Switzerland. The tax benefits of 3a life insurance policies are identical to those of 3a savings accounts, and the same limitations to contributions and withdrawals apply. Vested benefits life insurance policies are bound by the same conditions which apply to vested benefits accounts. The same holds true for 3b policies, which are subject to the same rules as 3b savings accounts and investment funds.
While whole life insurance can be beneficial if you want to protect your interests across your entire life, using a savings account to save for retirement and getting stand-alone term life insurance is almost always a better solution than using mixed life insurance to save for retirement. You can use the moneyland.ch 3a retirement account comparison and vested benefits account comparison to find accounts with the highest interest rates. The comprehensive term life insurance comparison makes it easy to find the cheapest term life insurance coverage for your needs.