Private Life Insurance in Switzerland: What I wish I knew before signing a Pillar 3 policy

[aneettajohn]

In Swiss retirement planning, many expats and locals find a draw in an insurance-linked Pillar 3a product, known as a mixed life insurance product. On the surface, it sounds appealing with its combination of guaranteed tax benefits and death or disability insurance. However, merging investing and insurance consulting can be an expensive lure. Unlike a flexible banking Pillar 3a account, an insurance-abiding plan requires you to pay the fixed premium regularly for many years, holding you hostage to a contract for an extended period. If something in your life changes, moves abroad, or taking a break from the career, you could face high penalties, or the loss of the investment due to the cancellation of your policy.

What is not often disclosed by distributors is the distribution of your initial premium. Most of your money in the early years will go towards paying the broker’s commissions, administrative expenses and protection against risk rather than building your investing capital. An early cancellation of a mixed life insurance policy may result in you losing thousands of Swiss Francs since guaranteed surrender values are very low in most cases. In addition, the fee structures in insurance products are typically around 2-3% per year, compared with less than 0.5% account fees in some bank-managed 3a index funds.

Lesson number one is that risk insurance and retirement savings should always be considered and kept separate from each other. For most of the situations, the better alternative is the opening a cheap and flexible Pillar 3a account either bank or securities account together with a pure term life cover if the person has a mortgage or dependents. It might not be that easy to get around the situations and it requires nonpartisan insurance advice, and not recommendations made by commission-driven providers. The independent advice enables you to get the proper assessment of the actual risk exposure so you do not end up paying for unnecessary bundled insurance cover.

Prior to signing the insurance policy get an exact breakdown showing the ratio between the premiums and capital, and also a detailed list of surrender values for the first five years. If you have already taken an inflexible insurance-linked Pillar 3a make sure to make calculations on whether it would make sense for you to pay the surrender fee to transfer the capital to a more flexible form of saving.