term life vs mixed life insurance

Term Life Insurance vs. Mixed Life Insurance

What is the difference between term life insurance and mixed life insurance? Get clear answers in this moneyland.ch guide.

There are many kinds of life insurance, including term life, whole life, universal life and variable life. In Switzerland, term life and mixed life (whole life) are the two most widely offered life insurance models.

What is term life insurance?

Term life insurance is what most people think of when they hear about life insurance. In exchange for premiums which you pay to an insurance provider over an insurance term, the insurer promises to pay out a benefit to a beneficiary if you die during the insurance term.

Example: You get a loan of CHF 500,000 and want to protect your spouse from having to deal with the debt if you die before you can pay it off. You take out term life insurance with a CHF 500,000 benefit and a 30 year insurance term – the amount of time it will take you to pay off the loan – to cover the debt if you die before you can pay it off. You pay CHF 1200 per year in premiums for the insurance until the term is over or until you die (whichever comes first).

As its name implies, term life insurance covers you for a predetermined insurance term. If you die within the insurance term, the insurance company pays out a premium. If you do not die within the insurance term, the insurance company does not pay out a premium.

There are several varieties of term life insurance. You can choose between policies which use the 3a or 3b categories (get more information in the moneyland.ch guide to 3a and 3b term life insurance). You can also choose between constant and decreasing deductibles.

The comprehensive term life insurance comparison on moneyland.ch makes it easy for you to compare Swiss term life insurance policies based on your specific needs.

What is mixed life insurance?

Mixed life insurance is the term used in Switzerland to refer to whole life insurance or permanent life insurance. This type of insurance covers you for your entire lifetime rather than for a limited period of time.

The difference between mixed life insurance and whole life insurance is that you “buy” a mixed life insurance policy while you only “rent” a term life insurance policy. A mixed life insurance policy has a face value (the guaranteed death benefit which you also find on term life insurance) and a cash value. The cash value indicates how large a portion of your policy you own.

Premiums charged for mixed life insurance policies are much higher than those charged for term life insurance policies. This is because only a portion of your premiums covers your ongoing life insurance. The remainder (minus administrative costs) builds your equity in the policy – its cash value.

Mixed life insurance premiums are calculated so that the cash value of your policy grows steadily over the life of the policy until it matches the policies face value or “matures”. In other words, your equity in the policy eventually covers the death benefit so that the benefit you receive is paid by your savings rather than by the insurance company – assuming you live until the policy matures. If you die ahead of the maturity date, the portion of the death benefit which is not covered by cash value is covered by the insurance company.

The insurance provider typically pays interest on your policy’s cash value, and this is accounted for when calculating premiums in relation to insurance terms. Insurers may also pay out dividends based on their annual profit performance. Depending on the policy, these possible dividends may be paid out in cash, applied to premiums, added to the policy’s cash value or added on top of the policy’s face value to increase the death benefit. There is no guarantee that the insurer will pay out dividends – these are entirely based on company performance.

Example: At age 40, you take out a mixed life insurance policy with a CHF 200,000 benefit, a guaranteed 1% interest rate on cash value and a 30-year maturity term. In this example, possible dividends are included in the death benefit on top of the policy’s the face value. You pay premiums totaling CHF 7000 per year. Of this CHF 7000, approximately CHF 5700 is added to the policy’s cash value. The remaining CHF 1300 covers the life insurance premiums and administrative fees. By the end of the 30 years, the cash value will match the CHF 200,000 face value of the policy, meaning you will completely own your policy. If the insurance provider paid out dividends equal to CHF 10,000 over the life of your policy, your policy’s benefit would be CHF 210,000.

If you cannot afford to pay your premiums for a pre-agreed amount of time, you may be forced to surrender your policy. That means you terminate your policy and collect its cash value – minus possible administrative fees and policy termination charges. You may also choose to surrender a policy in order to collect its cash value (in keeping with age-based limitations). Surrendering a policy ahead of maturity typically results in a significant loss for the policyholder.

Some mixed life insurance policies can also be sold on the secondary market. This allows policyholders which can no longer afford to pay their premiums or who no longer need their policy to sell the policy at an agreeable price rather than surrendering it at a loss. Whether or not a mixed life insurance policy can be resold and transferred to another policyholder depends on its terms and conditions. Getting a policy which provides this option can help prevent major losses if your life situation changes and you are unable to keep up with premium payments.

Mixed life insurance as a retirement savings solution

The majority of mixed insurance policies offered in Switzerland have living benefits. That means the insurance benefit can be cashed out while you are still alive, rather than after you die.

In some cases the maturity date of the policy coincides with the point at which you reach legal retirement age – after which you can claim the benefit. Some mixed life insurance policies only allow for the payment of benefits after your death – but allow you to take out low-interest loans which are collateralized by the cash value of your policy. Both of these policy types can be used to supplement the pensions your receive from social security and your occupational pension fund.

Mixed life insurance policies which make use of the 3a and 3b categories of retirement savings are offered. This allows you to save on taxes in the same way you would by saving money with a 3a retirement account or a vested benefits account.

Premiums paid for a 3a mixed life insurance policy are tax deductible (up to legal limits for 3a contributions) but you can only cash out assets when you reach retirement age or under several other clearly stipulated conditions (leaving Switzerland permanently or buying a home, for example). Premiums can be deducted from taxable income up to a predefined annual limit for 3a retirement savings contributions. 3a life insurance benefits are subject to strict inheritance regulations, so your choice of beneficiary is limited (spouse, direct descendants, dependents, legal heirs). If you surrender your policy ahead of retirement, the 3a assets must be transferred to another 3a savings solution.

3b mixed life insurance policies offer greater flexibility, allowing you to select any beneficiary you want and to receive benefits or surrender your policy ahead of retirement. However, there is no special tax deduction for 3b insurance premiums. These can be included – along with your other insurance premiums – in the general insurance premium tax deduction. However, this deduction is very limited.

Mixed life insurance policies which are linked to investment funds are also offered. Instead of paying out a guaranteed interest rate, fund-based policies aim to deliver returns on the investment of the policy's cash value.

These policies can potentially deliver higher returns, but generally have high administrative costs. If investment funds perform poorly, the value of their shares and subsequently the cash value of your policy (the savings portion) can decrease, so using investment policies exposes you to risk.

Disadvantages of mixed life insurance

The main disadvantage of using mixed life insurance is the high cost of administrative fees and the penalty fees charged if you surrender your policy.

Another disadvantage is the long-term commitment required. Carefully consider whether you are in a position to commit to paying premiums over several decades. If for some reason you are unable to keep up with your premium payments, you may be forced to surrender the policy at a heavy loss.

It is possible to buy a life insurance policy and pay just one or several lump-sum premiums. In this way, you create a cash value equal to the face value of the policy right from the start.

While doing this can make sense in some cases, it is important to note that lump-sum purchases of life insurance are considered one-time investments for tax purposes and therefore a stamp duty equal to 2.5% of the premium applies. If you buy a 3a life insurance policy using a lump sum, you lose much of the 3a tax benefit because you can only claim a deduction up to the annual maximum - typically a four-figure sum.

Because mixed life insurance policies do not provide additional tax benefits above what you can get by using other 3a or 3b savings solutions, it often works out cheaper to get a stand-alone term life insurance policy and open one or more stand-alone retirement savings accounts (a free 3a savings account, for example).

This is especially true if you are looking for a solution to save for retirement and a life insurance policy to cover you during your working life. While dividends paid out to mixed life insurance policyholders may help to balance out adminsitrative costs or even deliver a profit, dividends are not guaranteed so there is a certain amount of risk involved.

You can compare term life insurance policies based on your specific needs using the comprehensive life insurance comparison on moneyland.ch. You can also request free quotes right in the comparison at no charge.

The interactive 3a retirement savings account comparison on moneyland.ch makes it easy to find the accounts which pay the highest interest and request free quotes.

More on this topic:
Choosing the right life insurance coverage
Life Insurance: Useful tips
Term life insurance comparison
Term life insurance in Switzerland: 3a vs. 3b
Term life insurance: Constant benefit vs. decreasing benefit

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