How to ensure a comfortable retirement, effectively protect your loved ones, and simultaneously benefit from significant tax advantages? The solution lies in the 3rd pillar in life insurance. Insurers provide you with pension solutions that combine the benefits of the 3rd pillar, whether linked (pillar 3a) or free (pillar 3b), with the advantages of traditional life insurance. Intrigued by the possibilities? Follow our article to understand the benefits of life insurance and how to subscribe to it.
What is life insurance?
Life insurance can be structured in two ways: savings life insurance (also called mixed life insurance) and pure risk insurance. Life insurance savings is a contract between you and an insurance company, where you pay regular premiums to build up capital. This capital is intended to be given to yourself at the end of the contract or to your heirs in the event of death. This type of insurance also allows you to add flexible coverage in the event of death and disability, thus offering protection adapted to your specific needs. Conversely, some life insurances focus only on covering risks related to death or disability, without including a savings component, this is what we call a pure risk insurance (or death insurance). This form of insurance offers targeted protection for these events, without building up long-term capital.
What are the different types of life insurance?
Life insurance in Switzerland is divided into various categories, each of which meets specific needs in terms of pension provision and financial protection.
Pure risk insurance (or death insurance): This type of insurance is also known as death insurance. Its principle is simple: if the insured person dies before the end of the contract, his relatives or a designated person receive a predefined capital at the signing of the contract, thus guaranteeing their financial security. If the insured person survives the contract period, no capital is paid out. This form of insurance may include a guarantee in the event of incapacity for work, offering a pension if the insured person can no longer work due to illness or accident.
Savings life insurance (mixed life insurance): Combining the advantages of risk insurance with those of savings, this option makes it possible to build up capital for retirement while benefiting from coverage in the event of death or disability. These products, often referred to as mixed life insurance, can be taken out as part of linked (Pillar 3a) or free (Pillar 3b) pension plans.
There are also life insurances linked to investment funds that offer the possibility of investing some or all of the premiums in the financial markets, thus making it possible to increase returns, although this involves the risk of losing capital.
What is the relationship between life insurance and the 3rd pillar?
When you sign up for a 3rd pillar in the form of a Pillar 3a or Pillar 3b, with an insurance company, you are essentially opting for a form of life insurance. When you subscribe to this type of 3rd pillar, you have the choice between several options that you can integrate into your contract:
- Retirement savings: The 3rd pillar in insurance allows you to build up savings that you can use during your retirement or other specific projects. It is a way of planning for your future, ensuring that you will have the resources you need to successfully complete your plans in retirement.
- Death insurance: This component ensures the financial protection of your loved ones in the event of your death. It ensures that your family or the people you designate will receive a pre-determined amount, providing them with financial security in your absence.
- Incapacity for work insurance: This insurance is an additional protection that covers you in case of incapacity to work, due to illness or accident. If you are unable to earn a living, this insurance can provide you with a replacement income.
- Disability pension: It guarantees a pension paid by the insurance when the insured person is recognized as disabled as a result of an illness or an accident, and can no longer carry out his professional activity. This pension aims to provide a replacement income, thus contributing to the financial stability of the insured person. It is determined according to the terms of the insurance contract and the degree of disability, offering essential support to cover vital needs and expenses following a disability.
It is important to note that subscribing to the 3rd pillar does not automatically mean having life insurance. You can very well opt for a 3rd pillar savings account in a bank that does not include life insurance. Nonetheless, the choice between banking or insurance will depend on your savings goals and your overall situation.
Why take out life insurance?
Taking out life insurance has a multitude of advantages, here is why taking out life insurance can be an advantageous decision:
Preparing for your retirement: By investing in life insurance, you are building up capital that will complement the benefits of your 1st and 2nd pillar, allowing you to maintain your standard of living once you retire. This is an essential step in ensuring a comfortable retirement.
Valuation of your savings: Life insurance offers you a potentially higher return thanks to a guaranteed rate and the possibility of investing in investment funds. This gives you the opportunity to diversify your savings, maximizing your gains while minimizing risks.
Protection of your loved ones: In the event of unforeseen events such as death or incapacity to work, life insurance guarantees financial support and protection for you or your loved ones.
Financing of personal projects: The money accumulated thanks to your life insurance remains accessible and can be used to carry out important projects, such as buying a main residence, moving abroad or even starting out as a self-employed person.
Transmission of your assets: Life insurance allows you to plan the transfer of your assets by clearly naming the beneficiaries of the capital after your death, thus ensuring a succession in accordance with your wishes.
Tax benefits: By opting for a 3rd pillar in pillar 3a or pillar 3b, it is possible to benefit from tax deductions which can significantly reduce your income tax burden, allowing you to save as much tax as possible.
Who are the beneficiaries of a life insurance policy?
The insured, the person who draws up the life insurance contract and pays the premiums to the insurer, is distinct from the beneficiary. The latter is the one who will receive the capital from the contract following the death of the insured person. The designation of beneficiaries varies depending on the type of life insurance policy you choose.
For a linked 3rd pillar (3a), the law determines an order of priority for the beneficiaries:
- Spouse or registered partner
- Direct descendants or the partner (if you have lived with the spouse for at least 5 years continuously)
- The parents
- The brothers and sisters
- Other legal heirs
Please note that it is possible to change the order only from position 3.
On the other hand, with a free 3rd pillar (3b), you have the freedom to name anyone as a beneficiary. This offers you significant flexibility in planning your succession, allowing you to make decisions in accordance with your personal wishes and your family situation.
When should I take out a life insurance policy?
Taking out a life insurance policy is an important decision that deserves consideration, as it involves significant financial and personal considerations. There is no universal time to make this decision, but there are situations and stages in life where taking out life insurance can be particularly useful.
1. At the start of working life: When you start earning your own income, taking out life insurance is a great way to put money aside for your retirement, for example, while protecting yourself and your loved ones.
2. At the start of a family: If you have dependants, such as a spouse, children, or even elderly parents, life insurance can provide financial security in the event of an unexpected death, ensuring that your loved ones don't end up in a difficult financial situation should you pass away.
3. When acquiring major assets: If you're taking out a mortgage or making another big investment, life insurance can serve as a safety net to ensure that your debts won't become a burden on your family if you're no longer there.
4. For estate planning: Life insurance can be a strategic tool in planning your succession, allowing you to transmit capital to your beneficiaries in a tax-efficient manner depending on the solution chosen.
5. When you have savings to invest: Some life insurance policies offer the option of investing while benefiting from insurance coverage, which can be attractive for those looking to grow their capital while protecting themselves.
Conclusion: Life insurance isn't just about protection in the event of death; it's also a financial planning tool that can meet a variety of needs at different stages in your life. Assessing your personal and financial needs will help you determine the best time to buy a life insurance policy.
Also, don't forget to consult our detailed article on Life insurance taxation in the event of inheritance to find out more about this pension product.
