How does loss of income & disability insurance work in Switzerland?
As the below example illustrates the financial security of a family will be threatened if a parent can no longer earn income because they suffer from a bad accident or a serious health problem.
For those that fulfil all the financial and personal conditions of the pillar one and pillar two modules of the Swiss three pillar pension system individuals that earn CHF 85’320.-* per year will receive roughly 60% of that amount on loss of income or disability benefits.
Statistics reveal that the financial security of a family can “normally” be maintained with 80% of the last annual revenue. To cover this 20% earning gap it is possible to subscribe to a private pillar 3A or pillar 3B loss of income or disability module. Tax benefits are granted for these plans.
The income earning gap will often be much more than 20% for:
- the self-employed
- those that do not work
- those that have annual revenues under CHF 60’000.-
- those that have annual revenues over CHF 120’000.- depending on their pillar two pension plan.
A critical point to be considered is that there is a 12 or 24 month waiting period before the first and second pillar pensions are paid in case of loss of income due to illness. It is therefore of utmost importance to check if one’s employer voluntarily covers this period in case of illness with a plan called IJM, assurance collective Idemnité Journalière Maladie.
- For employees that do not benefit from an IJM plan the financial strain in case of loss of income due to illness will often be too much to bear. To counter this a private combined short- and long-term loss of income insurance plan should be subscribed to.
- For employees that benefit from an IJM plan they will be covered for 80% of their last salary for the first 24 months (or 720 days) in case of illness; the coverage will then decrease to 60% or less after this period. To counter this a private long-term loss of income insurance plan should be subscribed to.
Bearing these waiting periods in mind and the personal situation of each individual the private loss of income plan can be subscribed to with four different waiting periods:
- 3 months (short and long term)
- 6 months (long term)
- 12 months (long term)
- 24 months (long term)
Our expert’s recommendation:
Before meeting us 80% of our clients did not know the exact amount they would receive in benefits if they could no longer work due to illness or an accident, they were willing to wait and see if an event happened. We highly recommend contacting us for a 30 minute meeting for a free analysis of your personal situation as no two cases are the same. We will analyze your personal short- and long-term earning gap in case of loss of income or disability following a serious health problem.
What amount should I be covered for?
A person who cannot work due to a serious health problem in Switzerland is not permitted to earn more than 90% of their last salary. To get to 90% the previous example illustrated that the pillar 1 and 2 benefits compensated roughly 60% of a CHF 85’320.-* yearly salary, so the private pillar 3 module should cover CHF 25’600.- per year (CHF 2’130.- per month) for 90% coverage or CHF 17’000.- per year (CHF 1’400.- per month) for 80% coverage.
Our expert’s recommendation:
Contact us ! We will analyze:
.your personal short and long term earning gap in case of loss of income through a serious health problem
.the tax benefits of the plan
Extended coverage that can be added to the Swiss loss of income & disability insurance plan
.Recommended if your pillar 1 and pillar 2 savings pension funds are poorly funded
Add a savings plan to your loss of income insurance contract.
.Recommended if you have a mortgage
Add a pure risk or term life insurance contract to your loss of income insurance contract to be sure to be able to continue to finance your mortgage if the sick person passes away.
.Recommended if you earn more than CHF 180’000.- per year
Pillar one and pillar two benefits are capped at CHF 85’320.-* and accident insurance at CHF 148’200.-* For high earners the short-term earning gap in the event of loss of income through illness will be enormous if the employer has not subscribed to a voluntary IJM plan and the long term not much better. The situation will be similar in the event of loss of income through an accident if the employer has not subscribed to a voluntary high earner accident plan.
*Figures at time of publishing, 01/2019.
Glossary of Swiss insurance terms – Loss of income & disability insurance
Financial and personal conditions
Pillar one module: For loss of income following a serious health problem or an accident the monthly pension is capped at CHF 2’370.-* if the following conditions are met:
The person has contributed to the pillar 1 plan since their 21st birthday
The person has earned an average annual salary of CHF 85’320.-* since their 21st birthday. No bonus is accorded for salaries over CHF 85’320.-*
If both or either of the above conditions are not respected the amount can be reduced by as much as 50%.
Pillar two module: For loss of income following a serious health problem the pillar two module contributes an additional monthly pension of roughly CHF 1’700.- for an employee with a yearly salary of CHF 85’320.- Conditions vary enormously depending on the rules and regulations of each companies pension plan. The minimal legal plan is capped at 85’320.- so to receive better benefits for higher salaries an improved plan must be subscribed to by the employer. Pillar two loss of income benefits for salaries below CHF 60’000.- are below CHF 1’000.- per month.
Three pillar pension system
The Swiss pension system is known to be one of the best in the world. It is divided into three modules managed by the state, the employer and privately, it is referred to as the three “pillar” pension system or “trois piliers” in French.
Pillar one
Social security scheme (AVS), this module is guaranteed by the state. It includes pension, loss of income 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 two
Professional pension scheme (LPP), this module is guaranteed by the employers’ pension fund. It includes additional pension, loss of income and death benefits as well as accident (LAA) and optional illness related (PGM) loss of income benefits for 720 days. 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, plus compound interest.
Pillar three
Private pension scheme (3a and 3b), this module can only be guaranteed by a personal savings plan that can include loss of income 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 loss of income 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.
The yearly investment is tax deductible and can generate a tax saving of between 15 to 30% of the amount paid into the scheme.
Pillar 3B
Private loss of income scheme with no restrictions on the end of the contract, professional status and age. 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).
*Figures at time of publishing, 01/2019.
