What is endowment life insurance?
An endowment life insurance policy combines saving with risk protection. It allows you to save for retirement and protect your loved ones at the same time.
20.12.2022
iStock / Prostock-Studio
1. What is endowment life insurance?
Endowment life insurance is a a type of life insurance policy doubling as a savings vehicle. It protects you against the financial consequences of death and disability while allowing you to accumulate savings. Endowment life insurance usually acts as a pension pot.
You can pay the premium either regularly (monthly, quarterly, half-yearly or annual) or in a one-time lump sum. Good to know: You will be required to pay stamp duty on a lump sum premium.
Endowment life insurance payment schedule
Endowment life insurance premiums are divided into three parts:
Coverage of death or disability risk
Savings structure
Charges and administration fees (depending on the sum insured and the provider)
How it works: example
Assumptions: you pay an annual premium of 5,500 francs. The term of the contract is 20 years. In the event of an accident, the insurance company will pay you 111,000 francs once the contract end.
| Premium for whole year | CHF 5,500 |
|---|---|
| Policy term | 20 years |
| Interest rates | 2% |
| Fees and administration costs | CHF 385 (7% of annual premium) |
| Provisions for insured event | CHF 1,000 for the first year, then CHF 50 less every year after that |
| Final cash value if policyholder is alive | CHF 111,000 |
Cash value life insurance comparison
In pillar 3a, too, the cash value of a cash value life insurance can be invested in a savings account, or in a stock or index fund.
| Features | Pro | Con | |
|---|---|---|---|
| Pillar 3a | Savings in the restricted pension plan (retirement savings) | Security with tax advantages | Advance withdrawal only possible under certain conditions |
| Pillar 3b | Savings in the unrestricted pension plan | Savings (almost) always on demand, tax-free | Few tax advantages |
| Tied up in a fund | Share in an actively managed investment fund | Security with return opportunities | Risk: savings linked to market performance |
| Index-linked | Share in a passively managed fund (index fund) | Security with return opportunities | Risk: savings linked to index performance |
2. How does payout work?
You set the contract duration when you take out the insurance. If the insured person outlives the policy duration, the insurance company pays out the sum accumulated over the entire term of the contract.
If the insured person dies or becomes unable to work during the term of the contract, this is referred to as a "policy event." In the event of death, beneficiaries receive the insured sum. In the event of disability, the insured person receives the pension stipulated in the contract in accordance with the degree of disability.
Cash value life insurance with multiple payouts
Some endowment life insurances pay out in instalments. You may receive benefits in five or ten-year intervals. The last payout is usually made at the end of the policy period.
This type of schedule is only possible in conjunction with life cover. If the insured person dies during the contract period, the beneficiaries receive the full payout – even if partial payments have already been made.
Good to know
Insurance companies may pay out less benefits in a given policy year than predicted. In this case, many providers allow their insurees to share in their profits. You can find more information on the subject here: life insurance dividends
3. Can you surrender an endowment life insurance policy?
You should never decide to surrender your endowment insurance on a whim, as this usually puts a dent in your finances. The amount depends on the surrender value of the life insurance.
When you take out insurance with regular premium payments, these payments initially go towards covering policy events and administration fees. Once this is done, savings start to accumulate. Only then can funds go towards the surrender value.
Cash value life insurance – how to choose wisely
There are different life insurance models. The one that suits you the best depends on your needs. Would you like to provide a safety net for your family or avoid an income shortfall should you become unable to come into work? Be on the safe side and get independent guidance.
4. Endowment life insurance and taxes: what to bear in mind
Tax treatment of endowment life insurance depends on two factors:
Has the policy been taken out in pillar 3a or pillar 3b?
Are you planning on paying aone-time premium or periodically?
The cash accumulates on a tax-deferred basis.
This means the annual payments can be deducted from your taxable income.
You pay an income tax (in the case of pension benefits) or a capital drawdown tax (in the case of a one-off payment) when you draw on your retirement savings.
You pay a wealth tax on your assets.
If you pay regular premiumsm, the insurer's lump-sum benefit payments are tax-deductible.
If you pay a one-off premium your lump-sum benefits are subject to tax, except for life insurance policies used expressly to provide for the beneficiary.
If you withdraw your savings (e.g. if you surrender your policy), you do not have to pay a Tax on lump-sum withdrawal. For regular retirement benefit payments, you pay a lower tax rate on income.
More on the topic: tax regulations for life insurance in pillars 3a and 3b
5. What are the advantages of an endowment life insurance policy?
The policyholder can decide who receives the payout in the event of their death. However, there are restrictions under inheritance law.
Family entitlements take priority over those of creditors, provided the spouse or children are listed as the primary beneficiaries.
Because it locks you into regular premium payments, this type of vehicle ensures that you accumulate retirement savings – especially in pillar 3a.
6. The cons of endowment life insurance
If you terminate the policy before it matures, you need to pay a surrender value.
The fee structure is not very transparent
Dividends are not guaranteed.
Market risk if linked to an investment fund or index
