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 ?
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.
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.
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
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.
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.
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.
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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