The key question is whether you need insurance at all (see section 2). Once you have answered this question, the decision as to whether you need a bank or insurance is much easier. If you do not need insurance, there is no reason to subscribe to Pillar 3 insurance (see major disadvantages in section 1).
And even if the second chapter should lead you to the conclusion that you need insurance cover, we do not recommend insurance that combines 3a savings with risk coverage (mixed insurance). You can also choose to obtain insurance cover outside the 3rd pillar, with the advantage that you can then compare the offers more easily. This reduces the risk of paying excessive premiums.
For the savings portion, we recommend an account or a securities solution. This allows you to remain much more flexible than with a 3a insurance policy. You can decide each year whether and how much you want to pay in. Furthermore, you can easily open additional accounts/custody accounts (or transfer them to another provider) and thus create the conditions for staggered withdrawals.
Section 1: Major disadvantages of 3a insurances
Insurance policies have decisive disadvantages compared to an account or securities solution with bank foundations:
- No flexibility in terms of deposits: With many 3a insurances, you have to make a deposit every year, whether you like it or not. Even if you don’t work or only work part-time in a year, for example, because you are attending a further education programme, you still have to pay the premium bill. This means you are penalised twice. Because if you earn little, you may not pay taxes at all. So you cannot save taxes either. And even though you do not save any tax on your deposit, you still have to pay tax on the amount paid when you receive it.
- No staggered payout possible: You will also notice the lack of flexibility of insurance policies when you make your withdrawal. The reference date is already defined when the insurance is taken out. It usually coincides with the year of regular retirement and thus with a possible pension fund withdrawal. Since the lump-sum withdrawal tax is progressive and all lump-sum benefits are added together in one year, you pay more in taxes than if you would have the money paid out in another year (staggered payout).
- Lack of transparency in fees: For bank products such as accounts or securities accounts, you can read about the fees. However, insurance companies do not show any costs, but this does not mean that you are not charged any fees. They are simply not shown separately, but are included in the premiums. This lack of transparency makes insurance appear attractive. However, it is well known that insurance agents sometimes receive generous sales commissions, which you must first cover with your premiums.
- Complex and difficult to compare: Insurance policies that combine saving and risk protection are complex, especially if the savings portion is invested in funds. How much does risk protection cost? How high are the product costs of the funds? Is there an issuing commission when subscribing to the funds (sometimes up to 5%)? How much does it cost me to withdraw from the insurance contract? Who can keep track of this?
- Termination only possible with certain restrictions: Once life insurance policies have been purchased, they cannot be withdrawn without further notice. As a rule, you will suffer a considerable loss if you terminate the policy prematurely. This circumstance can also negate the benefits of early withdrawals, for example for the purchase of residential property. It is also virtually impossible to switch to another provider.
Section 2: Do you need insurance for the risks of loss of income, death or disability?
When assessing whether you need insurance, you must be aware that Switzerland already has a very well-developed social security system. We will discuss this further as far as the scope of this article allows.
Loss of earnings
If you lose your job, you will receive an unemployment benefit of 70 to 80 % of your previous salary (maximum insured salary is CHF 148’200 per year) after a waiting period of 20 days at the latest. If you have been employed for at least 12 months in the last two years before registering with the RAV, you are entitled to 200 to 640 daily allowances (approx. 1 to 3 years, as only working days but no weekends and public holidays are counted). The number depends on your age, the number of contribution years and whether you have children requiring financial support.
If you can live on 70 to 80% of your salary for a certain period of time, you do not need additional insurance cover in case of unemployment.
Do you have family members who depend on your income? If not, you don’t need insurance cover in the event of death. If so, the insurance requirement must be clarified on a case-by-case basis. It is best if you clarify how high widows’ and orphans’ pensions under the 1st pillar (AHV) and 2nd pillar (PK) would be and compare the sum with your current income. In the following, we assume that you are married and have children.
was mainly responsible for childcare should die:
- The amount of insurance cover depends to a large extent on the income from employment (pension fund insured or not? Amount of benefits?). If the partner who was mainly responsible for childcare dies, widows’ and orphans’ pensions are low.
- The surviving spouse has to reduce his or her workload in order to take over childcare themselves or to finance external childcare. If need be, even both.
All in all, this leads to additional expenses and possibly to a lower income. Decide for yourself: Will the pensions you would receive be enough to cover the shortfall?
If the partner who contributed the higher contribution to the total income dies, higher widows’ and orphans’ pensions are usually guaranteed. From a financial point of view, there may be sufficient financial protection to match the previously earned income. However, this raises the questions of whether the surviving partner can continue to work part-time and whether (expanded) external childcare is necessary to relieve the burden on the single parent who will be living alone from now on? Decide for yourself: Could you cope with the financial losses?
In the case of homeowners, it can make sense to have enough capital available in the event of death so that the second mortgage can be paid off in a single payment, thereby avoiding annual repayments. This can lead to a welcomed relief of the household budget. However, before you purchase a death benefit policy, check with your pension fund to see whether it offers restitution on your retirement assets. If the pension fund pays out the retirement assets in addition to widows’ and orphans’ pensions, you may not need any additional insurance at all. If the pension fund does not have enough money or no restitution is offered, a simple death benefit policy can be purchased with a decreasing sum insured.
Why a decreasing sum insured? The sum insured should decrease annually by the amount of amortisation. If your pension fund offers restitution, the future accumulation of retirement assets can also be deducted. In this way, you avoid being over-insured over the years and paying too many premiums.
The financial consequences of disability can be more extensive than in the event of death. The cost of living of the sick or injured person remains the same or may even increase due to the disability. Check your pension entitlement in 1st and 2nd pillar and compare it with your current income.
Disclaimer: No responsibility is taken for the correctness and completeness of this section. We recommend that you inform yourself about your situation with your pension fund (Pillar 2) and the AHV (Pillar 1) and, if necessary, consult an independent expert.
Insurance, which is always worthwhile, has not yet been invented
It is remarkable how popular perceptions, such as the idea that certain insurance policies are “always” worthwhile, persist in the general population. After all, from a purely business point of view, it is not at all possible for insurance to be worthwhile per se. If this were the case, there would no longer be any insurance companies, because they would permanently pay for more damage than they earn premiums. But of course, they don’t do that. They pay wages, commissions on sales and even make profits for shareholders in addition to the damage payments.
So before you fall into the mistaken belief that an insurance policy is “always” worthwhile, think carefully about whether and why you need the insurance. Because as with all goods and services in life, insurance also has its price. If you claim insurance that you do not need, it is just as much money wasted as if you bought a coffee machine but do not drink coffee. Well, at least you can serve coffee to your guests. But then the insurance is simply not necessary.
The difference between willing to take risk and being able to do so
When assessing whether you need insurance, a distinction must be made as to whether you are willing to bear the risk or not.
Nowadays many people buy insurance because they do not want to bear the risks of damage. They could easily carry it because they have enough money on the side, but they simply don’t want to. Moreover, they don’t want to have to pay anything if damage occurs. They prefer to pay an insurance premium for it year after year (including the margin for wages, commissions and profit). But they usually ignore the fact that insurance has its price.
Whoever has an entrepreneurial mindset thinks differently. He only covers damage that he cannot bear financially himself. He considers that if he will never purchase shipping insurance for online orders, he can easily bear the one or other shipping damage. Of course, he has to build up some savings for this. But at the end of the day, the calculation will pay off, because he will not have to co-finance the wages, commissions and profits of the insurance companies.
But what even the entrepreneurial thinker would not do without is, for example, liability insurance. The potential damage is simply too high to waive it. In other words, a liability case could drive him into bankruptcy. Similar cases can arise in the financial provision of relatives, especially if you have children who are not yet financially independent (see section 2).
Pillar 3b is not the same as pillar 3a
Almost all 3rd pillar offers have in common that payments can be deducted from taxable income in the tax return. However, we deliberately say “almost” because certain creative providers also offer a Pillar 3b in addition to Pillar 3a. Of course, this is very clever, because Pillar 3a has a very positive reputation and you can sell ordinary insurance policies (yes, these are primarily insurance policies that use the term Pillar 3b) under the guise of pension provision. Do not let this put you off. Pillar 3b is neither tax-privileged nor does it have a statutory pension character.
written on 07.05.2020