3A life insurance for indirect amortization?

Hi all

I’m in the process of buying a new house and I’ve been advised to take a life insurance (3A) for indirect amortisation. I know how badly these products are rated here as an investment, but I find little information about the potential advantages in the context of indirect amortization for real estate.

Here are the numbers for the insurance vs. bank that have been proposed to me :

  • life insurance : 6826.-/year, value of 86020.- at 15y in case of contract breakage
  • bank : 6826.-/ year at 0.2% interest + insurance at 650.- year (for the same services than life insurance, 200k, constant capital, insurance in case of incapacity) - I’m not sure if the money can be invested in funds (checking…)

In the meantime, since we see ONLY people going for life insurance when buying . I’m frankly reluctant to sign an inflexible 20+ years contract, with little benefits, but my wife has doubts about taking an “original” solution. Moreover, I will most probably be able to refund the mortgage (2nd range) before 15y so what’s the point of a 20+ insurance ?

Any thought ?

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Just invest your 3a with VIAC or similar. Indirect amortization doesn’t make much sense because you give up on part of the tax advantage that the 3a offers for investing.

3a life insurances are terrible.

Don’t take the insurance. Do the indirect amortization with the 3a account of the bank and invest it in their highest stock fund. The TER might suck but it’s still better than doing a direct amortization to save <1% on interest. Transfer only what’s needed and cover the rest with VIAC.

Insurance companies have similar solutions as banks regardings investment possibilities via pillar 3a. Doesn’t matter, if it is asset manager A or asset manager B, the outcome is nearly identical, if you take a fund solution from a bank or from an insurance company.

In my eyes, it depends on the individum if a bank and/or insurance solution makes more sense.

why you give up the tax advantage? I don’t think so!

in my case (Migros) the bank asked for a 3a from an insurance that covers the risk of me not paying the amortization.
I found Generali to be the cheapest
https://www.generali.ch/dam/generali/documents/files-en/produktedokumente/3a/Our-costs-compared-to-the-market
I can invest in 100% stocks and the bank was happy with the insurance being limited to 3000chf/year

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Well, you’ve basically summed it up for yourself, haven’t you?

Insure the risk (if) you have to.
Invest the rest as efficiently as you can.

I think the bundling/combination of investment and insurance products is routinely a ploy to trick you into buying a very costly (and/or just plain shitty) investment, by a combination of (among other tricks):

  • trying to make it look as if you could get insurance coverage “for free”, since you’ll be “getting back the money that you paid in” - by hiding and ignoring the opportunity costs.
  • obfuscating costs and returns by complex legal terms and contracts
  • “locking you in” to the investment over the long term
2 Likes

With indirect amortisation you have only the initial tax benefit. If you invest with viac, you have the initial tax benefit, the wealth tax benefit and the dividend tax benefit.

Hi all, thanks for taking the time to confirm my doubts. I will go for the bank solution and try to go with the most interesting solution there, depending on what is offered. Thanks again !

It makes no sense to chose the direct amortization if have to amortize anyway. Let’s say you have to pay 6’000 CHF/year for amortization and you are able to save 20k/year in general. Best option would be:

  • 6k/year indirect amortization over 3a bank account with highest stock fund
  • 0.826k/year VIAC
  • 13k/year IBKR

If you chose direct amortization, you are basically investing in your property to save maybe 0.8% in interest rate. The expected return of the 3a fund (as shitty as it may be due to high TER) is still a lot higher than that.

One benefit of direct amortization is that you start deleveraging immediately (to more acceptable levels), thereby reducing potential risks from sudden re-evaluations of the worth of your home (e.g. during a housing market crash). That’s of course only from a risk-orientated viewpoint.

And how is this different from indirect amortization with the possibility to always reduce the mortgage with the pledged 3a account?

You can also take a margin loan from IB and use it for direct amortisation.

You don’t give up the tax benefit of 3a after the indirect amortisation happened. The extra cost is around 0.7% for the higher interest on the first 100k on IB.

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So you are taking a 1.5% loan to save 0.8% on interest?

Option A:

  • 6k at 1.2% TER at bank that offers indirect amortisation
  • 0.8k VIAC
  • 13.2k VT or VWRL at IB depending on tax analysis result

Option B:

  • 6k direct amortisation
  • 6.8k VIAC
  • -6k margin loan at 1.5%
  • 13.2k VT or VWRL at IB depending on tax analysis result

So the higher interest of the margin loan is nearly the same as difference in TER of VIAC and the assumed bank TER. But with indirect amortisation, you will give up the 3a tax benefits after 15 years while you can keep them with direct amortisation.

With a pledged 3a account, this decision might be taken against your will, and, if you’re invested in securities in your 3a account, also to unfavourable conditions in terms of getting your money out of the market. If you have an insurance-type of 3a-solution, you might have to even pay fees for getting the money out early.

If you amortize directly, additional payment liabilites out of your mortgage contract can of course also be a problem, depending on whether you can inject enough equity in case of a housing market crash.

And what if interest rates rise and margim costs go to 3-4%/year?

You don’t have to give up 3a after 15 years. It’s just pledged to be taken at the latest when you retire. And often it’s not even nessesary because of the higher value of the property. Let’s say you buy something for 1 million with 200k cash. 8’900 indirect amortization per year (married couple). After 10 years you request a re-evaluation of the property and the bank is telling you that it’s worth 1.2 million now. 800k/1200k = 2/3. No need to pledge the 3a anymore, which you can now transfer to VIAC in full amount.

4 Likes

Just FYI, I’ve got the listing of the buyback values for the proposed insurance and tried to run a couple of checks :

  • bank 3A capital at 0.2% interests each year, minus total risk insurance premium up to year Y
  • buyback value of the life insurance at year Y

Maybe the comparison is wrong (let me know), it takes 23 years for the buyback value of the insurance to be equivalent to the bank solution.

It’s not. You are losing money with an insurance.

But you are paying for the insurance. Which if you bought a house, which children and a wife that maybe doesn’t work full time, might be appropriate to have.

The question is if it’s worth it compared to just a risk life insurance without any saving part.

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