How does life insurance in Switzerland work?
Life insurance is a powerful tax optimisation tool in Switzerland because it plays a central role in the Swiss pension system. Term life insurance and the financial risks related to the passing away of a parent or loved one, loss of income after an accident or illness and retirement planning are all inextricably linked in the three pillar system in Switzerland. The government grants considerable tax benefits to residents who link a savings plan to their term life insurance policy and to those that protect themselves and their family from the risk of loss of income due to disability.
What Swiss life insurance products are available?
Swiss life insurance contracts are divided into the following types, they can all be subscribed to as pillar 3A or pillar 3B, offering considerable tax benefits and a waiver of premiums clause to guarantee the contractual benefits at the end of the contract:
- the “pure risk” or “term” life insurance contract which offers a fixed benefit in case of death; it can be contracted on one or two heads (the life of one person or two different people).
- the “pure savings plan” life insurance contract with a waiver of premiums clause and the possibility to optimize returns with part of the funds invested being injected into the equity market.
- the “mixed” life insurance contract which offers a fixed benefit in case of death and a savings plan linked to the equity market or to the insurance surplus of the company.
- the “loss of income due to disability” insurance contract which offers a fixed monthly income if one can no longer earn money due to an accident or illness.
The above can be combined or subscribed to individually.
- the “retirement pension” insurance contract which kicks in at retirement age and offers an additional income for the rest of the beneficiary’s life. This can be a useful addition to the pillar 1 and pillar 2 pension modules. Reduced tax rates apply to the pensions received.
- the “payment plan” insurance contract which is similar to the retirement pension contract, but offers more flexibility on the way it can be financed, its duration and on the payment plan.
- the “investment fund account”. This is an investment fund account with no obligatory insurance coverage linked to it. Most insurance companies offer the opportunity to invest in the funds they use to manage their pension plans, so the funds with less than 40% invested on stocks are monitored and officially approved by the FINMA. Good investment fund accounts are flexible (in the amounts invested, the capacity to switch funds and the withdrawal policy).
Our expert’s recommendation
Contact us ! We will advise you on:
.which products are best adapted to your personal situation
.how to optimize your taxes through the three pillar system in Switzerland
.how the Swiss pillar 1 and pillar 2 modules apply to your life
.exactly how much you invest in and will earn through the Swiss three pillar pension system
What amount should I be covered for?
The amounts that a resident can be covered for depend on the type of insurance subscribed to.
- Pillar 3A maximum per person and per year: CHF 6’826.-* for Swiss residents with a professional pension plan (pillar 2, LPP).
- Pillar 3A maximum per person and per year: 20% of revenue (maximum CHF 34’128.-* ) for Swiss residents without a professional pension plan.
- Pillar 3B: no limit, but only a part of it can be used for tax optimisation in the Cantons of Geneva and Fribourg.
- Pure life or term life insurance: no limit, as required by the family to cover a mortgage or to protect the family if one of the money earners pass-away.
- Loss of income: the system does not permit a disabled person to earn more than they did when they were valid so the amount is limited to 90% of the resident’s last salary. To get to 90% the pillar 1 and pillar 2 disability benefits compensate between 40 and 65% of the last salary (depending on income level); the pillar 3 plan should cover the gap up to 90%.
Depending on the canton one lives in, the professional status of a couple and their available income the same family can double up on the pillar 3A limits. This means that a couple who both contribute to a professional pension plan can invest, and therefore deduct from taxable income, CHF 13’652.-* per year. The parents would need to subscribe to one CHF 6’826.-* contract per person. The Cantons of Geneva and Fribourg are the only two in Switzerland that authorize tax benefits for pillar 3B insurance plans. A couple in Geneva with three children could deduct a further CHF 6’000.- under a pillar 3B plan.
Our expert’s recommendation
The financial security of every family is inextricably linked to planning for the unexpected, tax optimisation and to retirement planning. A clear understanding of the Swiss pension system is required to make the right decisions, so we always advise speaking to an expert, contact us.
Risk management – bonds, equity or insurance surplus?
With today’s low or even negative interest rates inflation is not compensated, so leaving cash on a bank account over a long period of time means losing money. Swiss life insurance contracts with savings plans are an efficient way of making ones money work. As with every investment there is a risk-return ratio. Depending on your risk profile the following options are available:
- Low yield / no risk: Insurance surplus life insurance contracts with savings plan. No link to the equity market. The yield depends on the actuarial and underwriting performance of the company.
- Low yield / limited risk: Life insurance products with savings plan that use bonds to guarantee a yield.
- Medium yield / medium risk: Life insurance products with savings plan that invest no more than 25% of the yearly premiums on the equity market.
- High yield / high risk: Life insurance products with savings plan that invest more than 25% of the yearly premiums on the equity market.
Our expert’s recommendation
Risk management is also splitting the risk. It is possible to subscribe to two contracts per person, one with a limited risk profile and one with a higher risk profile. This strategy also has tax benefits at the end of the contract if the expiry date is in different fiscal years. Feel free to contact us to discuss.
Extended coverage that should alwaysbe included in to life insurance plans in Switzerland:
Always include the waiver of premiums with a three-month waiting period, make sure accident and sickness are covered.
Extended coverage that can be added to the Swiss life insurance plan:
.Recommended if your pillar 1 and pillar 2 savings pension funds are poorly funded
Add a savings plan to your pure risk or term life insurance contract or subscribe to a term life insurance plan with a waiver of premiums clause. Consider a retirement pension or payment plan insurance contract.
.Recommended if your pillar 1 and pillar 2 disability benefits are insufficient
Add a loss of income due to disability insurance contract which offers a fixed monthly income if one can no longer earn money due to an accident or illness.
.Recommended if you have a mortgage
As crazy as it might sound banks do not always oblige their clients to subscribe to a pure risk or term life insurance contract to protect the family if one of the parents passes away. This is a must as the survivor often cannot finance the mortgage and or the tax implications alone.
.Recommended in Geneva and Fribourg if you have young children
Invest a small monthly amount into a savings plan for your children under a pillar 3B insurance contract. This offers tax benefits in Geneva and Fribourg and a small capital for your children when they enter adulthood.
.Recommended if you earn more than CHF 120’000.- per year
Pillar one and pillar two benefits are capped at CHF 85’320.-* and accident insurance at CHF 148’200.-* These limits will heavily penalize the high salary earners pillar two pension savings plan and their income in the event of disability by accident or sickness if the employer has not subscribed to a voluntary high earner plan.
Glossary of Swiss insurance terms – Life insurance
FINMA
Swiss Financial Market Supervisory Authority (Eidgenössische Finanzmarktaufsicht).
Three pillar pension system
The Swiss pension system or three pillar system is known to be one of the best in the world. It is divided into three modules referred to as “pillars” or “pilier” in French.
Pillar 1: Social security scheme (AVS), this module is guaranteed by the state. It includes pension, disability and death benefits. All Swiss residents must contribute to the pillar 1 module for 44 years from 21 to 65 years old (64 for women)* or as soon as they receive an AVS salary. To qualify for the full pension of CHF 2’370.-* per month the beneficiary must have contributed for the complete 44 year period and to have earned at least CHF 3’754’080.-* over that same period (or an average of CHF 85’320.-* per year).
Pillar 2: Professional pension scheme (LPP), this module is guaranteed by the employers’ pension fund. It includes additional pension, disability and death benefits as well as accident (LAA) and optional illness related (PGM) loss of income benefits. The obligatory savings plan the employee must contribute to runs for a 40 year period from 25 to 65 years old; in this obligatory plan the capital accumulated corresponds to 12.5% (the average percentage over the period) of earnings over the 40 year period.
Pillar 3: Private pension scheme (3a and 3b), this module can only be guaranteed by a personal savings plan that can include disability and death benefits (life insurance). The pillar 3 module is designed to guaranty a comfortable standard of living at retirement. Pillar 3 is an integral part of the Swiss pension system, so the government offers large tax incentives to all private pension schemes. A private pension scheme with loss of income and death benefits can be subscribed to through an insurance company as soon as the beneficiary receives an AVS salary (pillar 3A) or when desired or required (pillar 3B).
Pillar 3A
Private pension scheme limited to residents who contribute to a professional pension plan (pillar 2) and in which the end of the insurance contract must be within 5 years of the legal age of retirement. Loss of income and death benefits can be added to the savings plan.
The yearly investment is tax deductible and can generate a tax saving of between 15 to 30% of the amount paid into the scheme. For Swiss residents who contribute to a professional pension plan the yearly investment is capped at CHF 6’826.-* from January 1 2019 (8% of the AVS maximum salary which increases over the years to compensate inflation); self-employed residents who do not contribute to a professional pension plan can invest 20% of their yearly revenue, capped at CHF 34’128.-* per year.
The cash invested in pillar 3A plans can be used before the end of the contract at their cash value for the following events:
.If the beneficiary leaves Switzerland
.If the beneficiary buys a property for personal use in Switzerland
.If the beneficiary needs to repay part of their existing mortgage
.If the beneficiary becomes self-employed
.If the beneficiary is within 5 years of retirement
The cash value of the private pension plan can also be pledged to guarantee a private loan with a financial institution or for a property purchase.
Pillar 3B
Private pension scheme with no restrictions on the end of the contract, professional status, age and the amount invested. Loss of income and death benefits can be added to the savings plan. Tax benefits for 3B insurance contracts are applied in the Canton of Geneva, but not the Canton of Vaud (or in most of the other Swiss Cantons).
The cash invested in pillar 3B plans can be used freely before the end of the contract at their cash value or be pledged to guarantee a private loan with a financial institution or for a property purchase.
Pillar 3B insurance contracts also offer more liberal beneficiary rights than pillar 3A contracts.
Waiver of premiums
The life insurance company will pay your premiums until the end of the contract if the policy holder suffers from a loss of income due to disability through accident and sickness; this guarantees the contractual savings and life insurance benefits.
Cash value
The cash value or cash surrender value is the sum of money an insurance company pays to a policyholder in the event that their policy is voluntarily stopped before its contractual termination date.
Insurance surplus
The surplus results if the contributions are calculated more cautiously than is necessary. The amount paid out is dependent upon the actuarial and underwriting performance of the company.
Positive changes in mortality, interest rate developments or efficient cost management can all increase insurance surplus.
*Figures at time of publishing, 01/2019.
