Amortisation / Life insurance

News from DL MoneyPark and information on the financial market and Swiss romande real estate

Author : Kristen

Whole life insurance

Whole life insurance provides protection in case of death as part of the private 3rd pillar B pension plan.

This type of insurance is not well known because few companies offer it in their range of products. Nevertheless, it is an ideal "tool" that should be considered in personalised advice on real estate financing, distribution during lifetime, and inheritance planning.

Unlike a risk-only policy that contractually determines the date of maturity, the whole life policy is, as its name indicates, a lifetime annuity that guarantees the distribution of benefits upon the policyholder's death.

In other words, it could be said that contract will reach maturity one day or another and the insurance company will be obliged to pay out the insured capital. For this reason, a provision is created and a surrender value is thus established. Also, this type of insurance participates in the policy of non-guaranteed surpluses, which are credited in addition to the capital.

Whole life insurance can be financed with periodical premiums (with or without waiver of premiums in case of disability) or a single premium. The insured benefits do not fall into the inheritance estate and it is possible to freely choose beneficiaries. These policies also benefit from certain privileges in case of bankruptcy and tax advantages (private 3rd pillar B plan).

Whole life insurance is considered by the tax authorities to be an endowment insurance that could be surrendered. Therefore, it will not be figured into the policyholder's assets, not taxed on the maturity date.

Now let's have a look at several examples of how whole life insurance could be used:

Saving and guaranteeing coverage after age 65

Mr. Dupont, age 40, buys a family house. The financing provides for indirect amortisation using a 3rd pillar A pension plan with death coverage. However, Mr. Dupont would like to have an additional capital of CHF 100,000 in case of death.

He takes out a risk-only policy with a duration of 20 years (maturity at 60 years) that costs him CHF 575/year, with a 20-year total of CHF 11,500. For this type of policy, the premiums will bring no return.

If he took out a whole life policy, the premium would cost him CHF 2,245/year. At age 60, he would have two choices:

  • Either keep his existing policy, be paid the benefit in case of death, and continue to pay premiums.
  • Or surrender the contract. He would then receive CHF 42,845. If we deducted from this benefit all of the premiums he has paid over 20 years, that is, CHF 44,900, his insurance coverage would cost him only 2,055 for 20 years!

The whole life policy could also be considered a part of the indirect amortisation required by the bank, as it includes a capitalised surrender value.

Another advantage is that if a new death coverage turns out to be necessary at age 60, a new risk-only policy would be denied due to a poor health condition, whereas the whole life insurance would continue until death.

Distribution during lifetime:

At age 65, Mr. Durand begins his retirement. He buys an apartment in the city and gives his country cottage to his son Paul.

Other assets are left to his second child, Nathalie. It turns out, however, that Paul has benefited more than his sister and he has to return CHF 100,000 to her when their father dies. Paul takes out a whole life insurance policy on his father's death and is the policyholder and premium payer (until his father's death) while his sister is appointed beneficiary. The premium costs him CHF 5,095/year. This formula allows him to avoid financial strain upon his father's death, which would otherwise force him to increase his mortgage loan. By receiving the insurance benefit, his sister will be compensated. If Mr. Durand dies at an early age, Paul will have a capital of more than CHF 100,000 intended for his sister as well as a surplus at his disposal.

Estate settlement:

Mr. Richard is a childless widower at age 70. He leaves his apartment in Montreux to his devoted nurse. She is very grateful, but she cannot afford the inheritance and gift taxes. Mr. Richard takes out a whole life policy for CHF 100,000 with a single premium that costs him CHF 86,615 (including stamp duty). Upon his death, the benefit will be paid out to Ms. X who will be able to pay the taxes and become the owner of the real estate. An additional surplus will allow her to renovate the apartment!

The whole life policy is comparable to a will. While still respecting forced heirship regulations, it is possible to make your spouse or any other person the beneficiary of amounts beyond that of statutory heirs because the insured sum does not fall into the inheritance estate.

In addition, the whole life policy can successfully replace risk-only policies for those of high income who are concerned that they are otherwise paying off "empty" premiums.

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