What is life insurance?

What is life insurance?

Life insurance covers risks such as death and disability. But it is also used to build up capital and individual retirement provision. A distinction is therefore made between risk insurance and capital products.

The point on your advantages

Coverage in the event of death or disability

When a person dies or becomes disabled due to an accident or illness, income loss is often substantial. State and professional provident institutions can only partially compensate for these income losses. In such cases, life insurance is an ideal complement. It makes it possible to close financial gaps by paying out an agreed sum of insurance.

Establishment of an old-age pension

To maintain your usual standard of living after the AVS retirement age, you generally need a private pension solution. Savings life insurance (also known as capital-building insurance or mixed life insurance) is easy to save money for old age under pillar 3a. They allow you to build up a long-term retirement provision and avoid a pension gap. 

Tax savings

Life insurance offers intelligent tax savings via the Swiss pension system. Indeed, payments into pillar 3a are deductible from taxable income. You can also find more information below.

Fiscal advantages 

Taking out 3a life insurance generally means reducing the tax burden. But life insurance also involves tax obligations. Find out how you can reduce your taxes with certainty and what you need to consider to declare your life insurance policy correctly.

Tax Savings: A User’s Guide

With life insurance, you can achieve targeted tax savings mainly thanks to the legal requirements of pillar 3a. Pension contributions paid can be deducted from taxable income (up to CHF 6,883 per year for employees and CHF 34,416 per year for the self-employed). The annual tax burden is reduced. 

Correct tax declaration

Here’s how to declare your life insurance on your tax return to benefit from the tax deduction:

3a life insurance

Periodic premium payments can be declared under “Contributions paid to recognized forms of linked individual pension provision (pillar 3a)”. The maximum value is CHF 6,883 per year for employees and CHF 34,416 per year for the self-employed.

3b life insurance

These payments can be carried over to the “Deductions for insurance premiums and interest on savings capital” section of the tax return. Here, too, there are maximum permitted deductions, which differ depending on the individual situation. They count on the payments made into the second pillar (pension fund or occupational pension) or into the 3a pension. 

It is also under this heading that health insurance premiums are reported. If the maximum possible deductible amount under this heading has already been reached with health insurance premiums, it is no longer possible to claim deductions under pillar 3b. 

Tax liability

Life insurance is subject to wealth tax in Switzerland under regulations valid for pillar 3b. If you have taken out 3b life insurance, you must declare it in your tax return. We have summarized the main provisions governing the tax liability of life insurance. 

Life insurance that can be redeemed is subject to wealth tax.

Policies are subject to surrender when it is certain that the insured risk (death or life event) will occur, but it is not known when. Policyholders can terminate these contracts and ask the insurer to return the surrender value, provided that the insurance premium has been paid for three years. These life insurance policies are subject to wealth tax. 

Capital saved under pillar 3a

Funds set up within a pillar 3a life insurance policy (e.g., using a 3a pension account) are not subject to wealth tax. Income tax is only due, at a reduced tax rate, on the regular payment of the 3a lump sum upon retirement.

Variants of life insurance

Risk

Risk insurance is used to ensure financial losses due to death or disability. Did you know? In this context, specialists also speak of “biometric risks.” 

Insurance in the event of death

In the event of death, the survivors of the policyholder (his family or a designated person) are insured against financial and economic consequences via death insurance. They receive an agreed payment, called guaranteed capital, in the event of death.

Pension in the event of incapacity for work

In the event of incapacity for work, a pension with guaranteed benefits is paid. It must make it possible to fill the gaps in income which appear following a severe event such as an illness or an accident. 

Savings life insurance (3a/3b)

These products include the benefits of a risk policy while enabling capital to be built up for the period following retirement and long-term retirement provision. Often referred to as “mixed life insurance,” they can be taken out either in the form of tied provision (pillar 3a) or free provision (pillar 3b). Fund-linked insurance is a form of savings life insurance. 

These products can generate a higher return than traditional investments (e.g., bank investments) depending on the situation.

To save enough for retirement provision, capital is increasingly being built up through equity investments. Experts recommend combined models for people who want to build up conditions for their pensions with the help of shares. With these models, part of the funds is invested in shares, while the other is reimbursed fixed or variable.

Different providers are present on the market, and it is advisable to compare the offers carefully.

By Master James

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