Is life insurance necessary? When is it worth it?
Life insurance protects you and your loved ones in the event of death or disability. Comparis explains when life insurance makes sense.
19.07.2022
iStock/StefaNikolic
1. Do I need life insurance?
In Switzerland, OASI (first pillar or state pensions) and occupational pensions form an important foundation for financial protection in old age and in the event of disability and death. However, the benefits from these two pillars of the pension system are limited. A life insurance policy in pillar 3a or 3b is one possibility for additional financial protection.
Is life insurance really a good idea? That depends on the type of life insurance and your personal life circumstances. Important factors include your age, marital status and whether you have children. A life insurance policy can serve as a retirement provision and/or cover in the event of disability and death.
As a rule of thumb, you can consider the following questions:
Would someone struggle financially if you were unable to work or died?
Are you self-employed?
If you answer both questions with no, you usually do not need life insurance.
2. Is life insurance suitable for a pension?
Mixed life insurance policies combine insurance cover with savings. This means that, in contrast to pure risk insurance, part of your premiums will be saved with a mixed life insurance policy. The other part is used for risk cover, fees and administration costs.
The advantages of mixed life insurance:
Requirement to save: you have to make regular contributions and are therefore forced to save, such as for old age.
Premium waiver in the event of incapacity to work: this cover is often included and means if you are unable to pay the premiums due to disability, the insurer will step in. That way, you will still reach your savings target.
The disadvantages of mixed life insurance:
Fee structure: unlike a bank solution, all fees and administrative costs for a mixed life insurance policy are incurred when the policy is finalized. These will be deducted from your first premium payments. Only when all fees and administrative expenses have been paid off does the savings process begin.
Lack of flexibility: if you reduce the sum insured or if you liquidate the life insurance policy early (for example, to purchase a home), you should expect significant financial losses because of the costs that have already been financed.
As a rule, combining risk coverage and savings is not worthwhile. Check the option of keeping savings and insurance separate. You may be more flexible and avoid unnecessarily high costs with separate savings and insurance products.
3. How do I protect my family and surviving dependants?
Do you wish to take out life insurance to cover your family? Or do you want to protect yourself against loss of employment? Life insurance can make sense in a range of cases:
Life insurance for loss of earnings
If you don’t have an occupational pension fund, you won’t receive a second pillar pension if you are unable to work. Income protection insurance can therefore especially make sense for self-employed people.
For employed people, it’s an option to close gaps in cover in the first and second pillars. Read more about this topic in the article on invalidity insurance/occupational disability insurance.
People who are not in employment, such as stay-at-home parents, can also take out disability insurance. However, they must take out their policy in the form of a sum insurance. Sum insurance pays the daily allowance independently from actual loss of earnings.
Life insurance and home-buying
After an early withdrawal to finance the purchase of residential property, pension funds may massively reduce the benefits in the event of incapacity for work or death. With risk insurance, you can close the resulting insurance shortfall.
Life insurance and cohabitation
Unlike married couples, cohabiting couples have to protect themselves financially in the event of death. The surviving partner will not receive any of the deceased’s state pension and, depending on the regulations of the occupational pension, they might also not receive a pension from the second pillar either. With death benefits cover, you can financially safeguard your partner.
Good to know: the payment from this kind of insurance is not subject to inheritance law. The beneficiary is therefore entitled to the total death sum, regardless of any deductions through inheritance law.
Life insurance and mortgages
If the mortgage is indirectly paid off, the payments will be saved in a pension account, a pension custody account or in a pillar 3a insurance policy. In the case of indirect payment through life insurance, if the policyholder dies, the mortgage is covered by the sum insured.
Life insurance and loans
You can cover a loan or mortgage with death benefits insurance. In the event of death, any survivors receive a pension or lump-sum capital payment with which they can continue to pay off debts.
This depends on the type of life insurance: pure risk insurance plays a minor role in a divorce. That’s because there are no savings here that could be divided between the spouses. However, if a divorce occurs, the reason for taking out the insurance policy in the first place often no longer applies. Termination of life insurance is usually possible after a minimum term (often three to five years).
Life insurance policies with a savings component are treated in accordance with the rules of the matrimonial property regime. This means in the case of community of property, the savings are divided. In the case of joint ownership of acquired property, any increase in value is counted towards the acquisition. The increase in value is the surrender value at the time of divorce minus the surrender value at the time of the marriage minus premium payments. In the case of the separation of property, the third pillar is not split between the spouses.
Important: for married couples, community of property is typically assumed; separation of property is normally applicable to registered couples. You need to actively agree on any deviations from these default assumptions.
Summary
Life insurance can be a good solution to safeguard any survivors and dependants (especially those in a cohabitating relationship) or also for personal protection against loss of earnings (for people who are self-employed or not in employment).
If you decide to take out life insurance, you should check the different providers. In particular, consider exactly what is covered (including in the event of any payment interruptions), the fees and how flexible the policy is. Let experts assist you if necessary.