Disability insurance in Switzerland
Who needs income protection insurance? When does it pay out? A guide to the essentials.
05.01.2023
iStock / gradyreese
1. What is income protection insurance?
Income protection insurance, also referred to as loss-of-income insurance or occupational disability insurance, covers you if you are unable to work due to an accident or illness. It is paid out at regular intervals.
The disability insurance helps you to enjoy your prior standard of living and avoid falling into debt. The minimum age is usually 18 years.
Disability and disability are not the same thing. Disability means the inability to pursue a specific profession. A hearing loss makes a conductor incapacitated. However, this does not necessarily make her unable to work because she can continue to work in other professions. There is no specific insurance for occupational disability in Switzerland – unlike, for example, in Germany.
Income protection is one element of risk life insurance and part of the private pension scheme (pillar 3). You can take out income protection insurance to cover both accident and illness, or just illness. In addition, you can specify as of when the benefits should start being paid out (e.g. from the moment you stop receiving salary payments from your employer).
2. Why is it a good idea to take out income protection insurance?
Should you become unable to work, both the disability insurance (IV/AI) and occupational pension scheme (BVG/LPP) will step in. However, these first and second pillar benefits are often not enough to maintain your standard of living.
In most cases, for instance, only up to 60% of your usual income is covered in the event of illness, and only up to 90% in the event of an accident.
3. How much will the income protection benefit be?
You are eligible for a pension if your disability is 25% or higher. The amount paid out is determined by the degree of disability.
If you are more than two thirds disabled, you are eligible for the full pension benefit. These are paid out four times a year – after the agreed waiting period.
Benefits of income protection insurance
Guarantees a regular income
Provides security for family members
Allows you to choose the amount and duration of benefits
Makes up pension shortfalls
Supplements pension benefits from pillars 1 and 2
Option to defer old-age pension
Surplus can be used to reduce premiums
Prevents you from falling into debt
4. Who can benefit from income protection insurance?
Families
Occupational disability affects multiple people in a family, both in terms of income and parenting (see "unemployed individuals" below). It is important to get the right protection.
Self-employed people
Self-employed people are not automatically covered by the second pillar (occupational pension). As a result, they aren't entitled to second pillar benefits and are likely to run up a pension shortfall if they become unable to work. They may also no longer be able to run their business and keep up mortgage payments.
Unemployed individuals
People with no occupational pension (e.g. stay-at-home parents) will be uninsured if they become unable to work. Expenses for a housekeeper or daycare can add up quickly. This is where income protection insurance comes into play, paying out a regular income for as long as the insured is unable to work.
Employees
The benefits from pillars 1 and 2 are not enough to maintain your standard of living, especially if you are unable to work for an extended period. Income protection insurance can reduce financial stress and make up any income shortfall.
5. Example benefits at 40% disability due to illness
A 40% disability entitles you to 25% of the full disability benefit amount. You can find out more about how these benefits are calculated at the OASI/DI information centre. The benefits in this example are as follows:
| Without income protection insurance | With income protection insurance | |
|---|---|---|
| DI pension / year* | CHF 7,350 | CHF 7,350 |
| Occupational pension / year** | CHF 6,225 | CHF 6,225 |
| Pension from life insurance per year due to illness*** | CHF 0 | CHF 3,000 |
| Total pension payments per year | CHF 13,575 | CHF 16,575 |
| Total pension payments / 5 years | CHF 67,875 | CHF 82,875 |
* ¼ of the full pension according to the OASI/DI scale
** assumed BVG DI pension of 40% of the maximum coordinated BVG salary (i.e. CHF 24,990), of which ¼
*** 40% of the contractually agreed benefit
Assumption: pillar 3a pension solution (Swiss Life Protection). The insured person is 40 years old, an architect with a university degree and a non-smoker. His annual salary before disability was 88,200 francs (equivalent to the insured maximum annual pillar 1 salary), and his degree of disability is 40%. His insurance premium amounts to 421.10 francs per year. (As at 2023)
6. FAQs
If someone becomes unable to work, their income will be reduced either partially or completely. The extent of their incapacity for work is determined by the disability insurance office.
Many income protection insurance policies will waive premium payments if an insured event occurs. This means that, after the agreed waiting period, the insurance company will pay some or all of the premiums owed during the period of the claim. The extent of the waiver generally depends on the degree of incapacity for work.
If you take out income protection insurance via pillar 3a, you can deduct the maximum amount from your taxable income.
