Risk-only insurance premiums: pillar 3A or 3B?

Finance, Taxes, Banking, Insurance and Retirement
1

This is not the usual question about hybrid insurance models, my question is more straightforward, and yet so far no accountant or insurance agent managed to answer satisfactorily, maybe you can enlighten me?

Let’s say that I have a risk only insurance, like for example a life insurance. It’s a simple product: I pay, I get protection (until 65 years of age), and there is no lock-in period, I can quit it whenever I want by just stop paying the premiums and sending a letter to the insurer. There are also no savings or investments: the money I spend in the premiums is “wasted” (hopefully). However, this is still a product related to social security, therefore I have only two ways of paying these premiums to the insurer: in a dedicated pillar 3A account, or a 3B one. Which one is more convenient for me?

My reasoning is as follows: I want to put as much as I can every year in my 3A, because it’s tax-deductible, but I also don’t want that money to be wasted: I might leave Switzerland one day, or maybe I reach retirement age and I might decide to cash out, or buy a house, etc. And, since there is a limit on how much money I can put in 3A per year, I prefer to pay my insurance premiums in 3B, so I can free up all the allowed amount for 3A savings.

My insurance agent and my accountant did not agree: they say that, as a general rule, it’s always better to put all risk-based premiums in 3A. The reasoning is that if, one day, I cash out my pillar 3A, I have to pay taxes on that, so in a certain sense, the less I have in 3A the better. Instead of putting, say, 7’000 CHF savings in 3A and 1’000 CHF premiums in 3B, they recommend putting 6’000 CHF savings + 1’000 CHF premiums in 3A, and 1’000 CHF savings in another financial instrument, like ETFs or similar. I still get 7’000 CHF/year tax-free, but in the latter case I can only ever cash out 6’000 instead of 7’000 (times nr of years), so I get taxed less in absolute terms, while ETFs and similar instruments usually give better yields.

I’m not convinced about this reasoning: because those 1’000 CHF that I would invest in ETFs will be taxed not only in case of cash-out, but also as financial assets at every tax declaration! While the money in 3A is completely tax-free until I cash out, and if I put it in tools like FinPension or VIAC, I can also reinvest it in financial instruments that are also very performant, almost at the level of “raw” ETFs.

So, what am I missing here? Is my agent trying to scam me? Thanks!

2

You’re chasing a red herring

If you want a life insurance product, just buy it as it is, pay it as any other insurance. It’s not a “social security” product. There is no such thing. Don’t mix it with 3a or 3b

You pay 3a money to buy a pension fund only to benefit of the tax deductions. You can use 3a pension money to buy a house. You get it back when you leave Switzerland. Read about it, plenty of info on the net

3b is worthless. You block money until pension age without any tax benefit

Hope this helps

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3

Can you point me to a risk-only life insurance that allows to pay premiums through anything but a 3A or 3B account? Because last time I checked, yes, this type of insurance is considered social security, therefore falls in the pillar 3 category. But I might be wrong.

And, just to be clear, I know that it’s usually a bad idea to mix risk and savings, I’m not looking at mixed policies.

Thanks.

4

Right, sorry I wasn’t aware actually that the life insurance policies (at least the ones I see at the major providers) are either through 3a or 3b, sorry

I read your question better.

The 7000/1000 vs 6000+1000/1000 example is wrongly thought out. The later is fact 6000+1000/700 (assuming you pay tax at 30%) because the 1000 brut salary you think to invest has to be taxed in the income year (i.e. before you invest it in ETFs).

Then the 3A 6000 will further be taxed when you get it out, at say 10%. So you at the end you are comparing 6300 (7000 taxed at 10%) vs 5400 + 700. The difference will be given by the time you have to invest and the return rates of the 3a vs ETF… It evens out most of the time, consider that ETFs carry a lot more risk…

5

The only thing I can think of is that the premium life insurance part of the 3a is tax deductible. This is a yearly payment that is not added to the actual savings part of the 3a. However, the insurance payment is still tax deductible. Where as if you buy directly a life insurance policy the money you pay in has to come from your taxable income. Also keep in mind that upon retirement and payout of the 3a savings you will get taxed. However, at a lower rate based upon the amount.

6

OK but I don’t understand two things.

First, according to your argument, shouldn’t also the first scenario be more like 7000/700? For the same reason: because what I put in 3B is not tax-free. OK, given that this would be premium for an insurance, then it might be partially tax-deductible, but IIRC the cap for personal insurance deductions is very low, to the extent that you often fill it already with the health insurance premium, so I wouldn’t consider this.

Second question is, the “Tax Drag” in the second scenario (premium in 3A + investment in ETFs). In this scenario, I pay Wealth Tax every year (approx. 0.1%–0.5% depending on the canton) and Income Tax on Dividends (approx. 30% of the yield). In a 100% equity 3A (Finpension/VIAC), these taxes are zero. Over 30 years, this “tax drag” in 3B hurts more than the one-time 10% exit tax in 3A, am I wrong?

7

Car insurance is risk only. Life insurance is not risk only - you do not insure a risk, but a certainty. It is not a question “if you will pay” but “when you will pay”. If you cancel your car insurance, you get nothing back. If you cancel your life insurance, you get some money back as the insurer will not have to pay in the future anymore. (Actually, the insurer will tell you each year how much that amount would be, if you are doing a tax return it would go under ‘wealth’)

As others said:

  • do not mix life insurance with pensions
  • consider paying into Pillar 2, if you are from abroad or did not live in Switzerland all your adult life, there will be gaps worth filling. It is tax-deductible, (usually) have better rewards than Pillar 3a, and the limits (ie the gaps) can be huge .
  • Pillar 3B tend to have high admin/commission fees and are not attractive to me. The first 5+ years I would probably be paying the commission to the guy who sold me the product. This is why they are agressively marketed, and also why I don’t agree with them on principle.
  • Pillar 3b effectively convert “revenue/dividents” which are taxed as income a lot, into “fortune/wealth” which are taxed a lot less, by masking them as Insurance Products (who have 0 revenue, but something to put under wealth in your tax returns).
  • The tax rate is not the whole picture…The ‘tax drag’ you mention is very subjective… you can have a pillar 3a with very low taxes but wher you only made 10k in its lifetime, whereas you put the same money in shares and make 60k, with a tax at 30%.. which would you prefer?
8

Look, I am happy to hear suggestions, but maybe I was not too clear on what I wrote, let me try again.

Sorry, but I think that all this is extremely inaccurate. There are many different types of “life insurance”, I am concerned specifically with the “risk only” one. I know what I’m talking about: I have one from Zurich.

What I have noticed is that there is a lot of misunderstanding on the insurance 3B topic, and starting my post with “this is not the usual stuff” never helps. People have gotten burnt so much with the “mixed 3B insurance” scam that by now everyone assumes that 3B = scam by default. Please read again my post: we are not talking about the same thing.

9

Yes, you are right, to be more precise, the first scenario should be 7000/1300 with a return of 6300/0 at withdrawal (without any accumulated 3a portfolio performance). The second scenario should also be 6000+1000/1300 (assuming you invest 1000), with a return of 5400/1000 - but without any accumulated 3a+ETF performance and subtracted wealth tax on the 1000.

Which one is better is difficult to calculate because it depends on the length of time you invest and the return difference between 3A and ETF. Some calculations I’ve seen before indicate that investing in 3a becomes more interesting somewhere between 10-15 years before retirement, because the tax difference is higher than the investment return difference. But it depends a lot on the markets any the rates you are getting. You do your own calculations :slight_smile:

Also, whether a life insurance product is really worth it really depends on personal circumstances

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