What is unit-linked life insurance?
Make provisions and earn a return? Those who take out a life insurance policy with funds can invest the savings component. Comparis explains the advantages and disadvantages of unit-linked life insurance in Switzerland.
01.11.2022
iStock / Ago87
1. Definition of unit-linked life insurance
A unit-linked life insurance policy covers the financial risks of death and/or disability. This insurance coverage is similar to conventional whole life insurance. An important difference: it also contains a savings component that you can invest in a fund.
How does a life insurance policy work with funds?
Deduct the acquisition and administration costs and the premiums for the insurance coverage from your payments. This results in a savings component that flows into the fund. You can make periodic premium payments or make a single premium payment.
How does the payout work?
After expiry or in the event of early termination, the insurance company will pay you the current market value of the fund shares as follows: one-off payment, payment in instalments, transfer to an account with preferential interest, or transfer of the fund shares to a custody account.
Some insurance companies guarantee a minimum retirement capital. That is something you would receive regardless of how the securities perform. A prerequisite for that: you have not terminated the policy prematurely.
What applies in terms of taxes?
With a pillar 3a policy, you can deduct the premiums from your income in your tax return and thus reduce your tax burden. In this case, taxes are due when the money is paid out.
With a 3b solution, the payout will be tax-free under certain conditions. In this case, there are no deductions in the tax return.
2. Advantages of a unit-linked life insurance policy
Investing the savings component in securities (funds) increases the potential returns. That means you will achieve attractive returns if the development is positive. The chances of returns will especially increase with a longer-term investment horizon.
Comparis tip
In the event of occupational disability, some insurance companies will pay the premiums for you. That will enable you to still achieve long-term savings goals. This is a big advantage over bank offers.
3. Unit-linked life insurance: disadvantages
The potential returns are greater than with a conventional life insurance policy. However, the risk is also higher. The performance is not guaranteed. The higher the share component, the higher the risk of loss.
The acquisition and administration costs also need to be taken into account. These costs are often very high and can thus cancel out any tax advantages.
Comparis tip
Some products offer capital protection. For example, certain minimum benefits are contractually regulated – regardless of the fund's performance.
4. Limited fund selection
The performance of funds is subject to price, currency, and interest rate risks. You can mitigate any risks by choosing the right fund. Normally, you can invest the savings component of your life insurance in an existing fund portfolio. Alternatively, you can choose the funds individually from the range offered by your insurance company.
5 Conclusion: Is unit-linked life insurance worthwhile?
With a unit-linked life insurance policy, you can participate in economic development. Conventional life insurance policies offer you fixed-interest savings for old age. Depending on the interest rate situation, that could be less lucrative.
However, there is no reliable way to predict the performance of funds, which means that the exact amount of the payout will be unknown. Without an agreed minimum payout, there will be a risk of total capital loss.
