Term Life Insurance vs. Mixed Life Insurance

What are the advantages of term life insurance?

• Lower insurance premiums

The main advantage of term life insurance is that it is generally cheaper than mixed life insurance. It is generally the most affordable way to protect your dependents against financial risks associated with your dying unexpectedly.

• Simple and transparent

Term life insurance is generally simple and transparent. 

• Tax deductions

If you take out term life insurance under the pillar 3a (tax-privileged private insurance), you can deduct the insurance premiums from your taxable income as part of the pillar 3a tax deduction. Premiums paid for Pillar 3b term life insurance are also tax deductible, but only as part of the tax deduction for insurance premiums and interest yields, which is typically completely taken up by premiums for mandatory health insurance.

What are the disadvantages of term life insurance?

• Premiums are lost if no claims are made

Term life insurance is a pure insurance product. This means that in the hopeful event that you do not die within the insurance term, you do not get back any part of your insurance premiums you paid. The money is gone forever.

• Insurance benefits are taxable

The benefits that your chosen beneficiaries receive if you die are subject to a special tax at the time that they are paid out. You should account for the taxes when calculating how much insurance you need.

What are the advantages of mixed life insurance?

• The final cost may be lower

A possible advantage of mixed life insurance is that if you keep the policy for the entire insurance term and pay your premiums without fail, the cash value of your policy at the end of the term may be as high or even higher than the total premiums you paid. In this case, using mixed life insurance can work out cheaper than using term life insurance.

However, whether or not the cash value covers the cost depends on the guaranteed cash value schedule, interest rates or returns on investments over the insurance term, and whether or not the insurance provider pays out life insurance dividends.

• Tax deductions

As with all other insurance solutions available under the pillar 3a, the premiums for pillar 3a mixed life insurance can be included in the pillar 3a tax deduction. Premiums paid for pillar 3b mixed life insurance can be included in the tax deduction for insurance premiums and interest earned on savings, if the limit is not already reached with your mandatory health insurance premiums.

If you use a pillar 3b mixed life insurance with premiums that are paid in regular intervals across the insurance term, then the insurance benefits are tax free. That applies both to benefits paid out in the case of death or disability, and to the cash value paid out to you at the end of the insurance term.

Important: The cash value of a pillar 3b mixed life insurance policy must be declared as wealth in your tax declarations.

What are the disadvantages of mixed life insurance?

• High insurance premiums

The insurance premiums are high in relation to the death benefit. This is because only part of the premiums pays for the term life insurance, while a portion goes towards building cash value, and part goes towards administrative costs.

• Rigidity

Mixed life insurance is generally very inflexible. You are bound to paying insurance premiums regularly, regardless of your financial situation. Once you take out mixed life insurance, you must keep it for the length of the insurance term. Terminating mixed life insurance before the end of the term will almost always result in a financial loss. With many mixed life insurance offers, you lose the entire accumulated cash value when you terminate the policy within the first several years.

• Suboptimal returns

While mixed life insurance is a relatively secure savings instrument, savings accounts and pillar 3a accounts are equally secure and offer much more flexibility. Unlike a mixed life insurance policy, you can change savings accounts at any time without any loss.

For investing, the high costs of many mixed life insurance policies make them an expensive alternative to investing directly (in ETFs, for example) using cheap online trading services. For the less investment-savvy, using a low-cost asset management service or robo advisor is generally a better financial move. A fund savings plan is an even simpler solution.

For retirement planning, a digital retirement asset management service or retirement fund provides a much more flexible alternative to mixed life insurance.

Insurance companies tend to advertise the fact that, depending on returns and dividends, the money they pay out at the end of the insurance term may be higher than the sum total of the premiums you paid in. But comparisons show that using the cheapest investment solutions from banks usually delivers much higher returns than using mixed life insurance.

Be wary of insurance brokers who push life insurance products with cash value

Think twice before you sign. Insurance brokers earn up to several thousand francs in sales commissions for each new mixed life insurance sold. This can lead to conflicts of interest.