Risk-only insurance premiums: pillar 3A or 3B?

1

This is not the usual question about hybrid insurance models, my question is more straightforward, and yet so far no accountant or insurance agent managed to answer satisfactorily, maybe you can enlighten me?

Let’s say that I have a *risk only* insurance, like for example a life insurance. It’s a simple product: I pay, I get protection (until 65 years of age), and there is no lock-in period, I can quit it whenever I want by just stop paying the premiums and sending a letter to the insurer. There are also no savings or investments: the money I spend in the premiums is “wasted” (hopefully). However, this is still a product related to social security, therefore I have only two ways of paying these premiums to the insurer: in a dedicated pillar 3A account, or a 3B one. Which one is more convenient for me?

My reasoning is as follows: I want to put as much as I can every year in my 3A, because it’s tax-deductible, but I also don’t want that money to be wasted: I might leave Switzerland one day, or maybe I reach retirement age and I might decide to cash out, or buy a house, etc. And, since there is a limit on how much money I can put in 3A per year, I prefer to pay my insurance premiums in 3B, so I can free up all the allowed amount for 3A savings.

My insurance agent and my accountant did not agree: they say that, as a general rule, it’s always better to put all risk-based premiums in 3A. The reasoning is that if, one day, I cash out my pillar 3A, I have to pay taxes on that, so in a certain sense, the less I have in 3A the better. Instead of putting, say, 7’000 CHF savings in 3A and 1’000 CHF premiums in 3B, they recommend putting 6’000 CHF savings + 1’000 CHF premiums in 3A, and 1’000 CHF savings in another financial instrument, like ETFs or similar. I still get 7’000 CHF/year tax-free, but in the latter case I can only ever cash out 6’000 instead of 7’000 (times nr of years), so I get taxed less in absolute terms, while ETFs and similar instruments usually give better yields.

I’m not convinced about this reasoning: because those 1’000 CHF that I would invest in ETFs will be taxed not only in case of cash-out, but the dividends are also taxed at every tax declaration! While the money in 3A is completely tax-free until I cash out, and if I put it in tools like FinPension or VIAC, I can *also* reinvest it in financial instruments that are also very performant, almost at the level of “raw” ETFs.

So, what am I missing here? Thanks!

2

The problem is 3B tax deduction elligible products are usually awful. If you want to do savings in 3B, it’s usually a mixed insurance/savings policy which is better avoided. So 3B is usually best avoided when it comes to retirement savings.

If you can find a risk only 3B policy AND you actually need it, then it’s potentially worth it. It’s not clear to me from what you state that you actually need it, though, you state maximizine 3A tax deductions, which is great, but a tax deductible product you don’t need is still (1-your marginal tax rate) * the premiums money simply thrown away.

If you do need it, though and you can find it in this form, a 3B risk only policy can be worth it.

Another thing to consider is that you may move to a canton without 3B deductibility, where you would have to pay full price for your policy.

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Just to be clear: yes, I’m looking at risk-only 3B policy

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4

If 3b is deductible for you, I don’t think there’s a scenario where it’s better to do the pure life insurance in 3a.

(because you can’t do tax free equity investment outside of 3a, so it’s just an extra deduction for you)

edit: and if there’s no deduction, I think it’s true (because there can be a bit of progression in the tax rate for capital withdrawal), but the impact is likely so marginal that I’d pick based on where the cheapest premium is instead.

5

Well, since these are life insurance premiums in 3B, they are partially tax deductible (up to a certain pauschale I think). But even if they were 100% non-deductible, is my reasoning wrong? The money I would invest in ETFs instead of 3B are also not deductible, so what would be the advantage of paying premiums in 3A?

6

If we simplify things, let’s assume we have same return (r) in 3a and outside (e.g. the finpension fee is ~equal to the tax on dividends).

And let’s assume we only put money in the pot once, 7k invested, 1k of premium (ok lots of assumptions :slight_smile: )

So when we withdraw we have:

  • [all investment in 3a]: 7k * r * (1 - tax_rate_1)
  • [split investment]: (6k * r * (1 - tax_rate_2)) + (1k * r)

typically, the tax rate is progressif (tax_rate_1 > tax_rate_2), and looking at it now, it seems like the second scenario always win? (even without the progression, if tax_rate_1 = tax_rate_2)

7

I like your analysis, but shouldn’t it be as follows instead?

where tax_rate_3 accounts both for the withdrawal tax and the tax on dividends over the years? Because, if so, my claim is that the overall tax rate in case 2 is greater (or at least no less) than case 1.

8

That was this assumption (which I think isn’t that far off):

At most (max tax rate), the tax drag in dividend is like 40% of 2% (dividend yield) from the overall return?

9

What is the difference between 3B and a normal investment account (e.g. at Saxo, Interactive Brokers, Degiro, Swissquote, …)? I don’t see a difference, they look like the same to me, also from a tax perspective.

10

Risk-only life (death?) insurances exist as a separate product that has nothing to do with pillar 3 and works exactly as expected. A hopefully wasted premium to guarantee a capital for your beneficiaries.

Rules are clear, no mix with savings, pure premium.

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11

I have a pure risk life insurance.

200k chf (match with 2y of salary) if I die.

I have a spouse and 2 children. This is why I have one.

Generali, premium is 270 chf per year.

Eventually you can take a decreasing payment on case of death over time, which decrease the premium each year.

This is 3b. As it is pure risk, I can’t deduct anything. And I can still full deduct my 3a.

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12

Insurance 3b have some tax deductability in Geneva and Fribourg (at least).

13

Can you provide an example of a risk-only life insurance which can be paid directly without going through a 3A or 3B account? Because, the last time I checked, this was simply not possible: since life insurance is considered a form of social security, you must pay it through one of these instruments. But happy to be proven wrong.

Now, please read carefully the following paragraph, because sometimes I think that I’m writing in transparent text. I’m not blaming you, it happens with everyone: people have gotten burnt so much with the “mixed 3B insurance” scam that by now everyone assumes that 3B = investment scam by default. This is not what I’m talking about here.

The “premiums in 3b” I’m talking about has nothing to do with savings. It’s just a bill that I pay for the premiums, money that goes to waste. Except that, instead of paying it on a random bank account of the insurer, I pay it on a pillar 3b account of the insurer. What they do with it I don’t care, it’s not my money anymore. In the pillar 3a case, same thing: it’s money that I pay and won’t see anymore, the difference being that they are 100% tax-deductible.

I hope that clarifies.

14

I think also in Zurich, but with a very low cap with all personal insurance premiums combined, usually I fill it completely just with the helath insurance + personal liability + household insurance. If the cap were higher, then I agree that the discussion would become much more interesting. But as it is now, I really don’t see the benefit of paying these premiums in 3a rather than 3b.

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15

Dear Lord, thank you! This is exactly what I’m talking about. Same situation, albeit with Zurich, not Generali :slight_smile:

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I apologize, I might have been wrong. I subscribed one abroad and of course it’s not linked to Swiss pillars.

Then I had the impression that subscribing something like “life plus” at VIAC was an addon which had nothing to do with pillar 3 itself. It might as well.

https://www.helvetia.com/ch/web/en/private-customers/pension/whole-life-insurance.html

17

I don’t get it. As I understand it, anything outside of 1, 2, and 3a is automatically 3b. Your picture on the wall is 3b. Your car is 3b. Your money in the bank account is 3b. Your ETF is 3b. So logically, your life insurance outside of 1, 2, and 3a is also in 3b, like any other “asset”.

But of course, I could be wrong.

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18

Alright, that explains it then :slight_smile: I know LifePlus from VIAC but it’s basically a toy, it’s something they give it to you for free according to howe much money you have invested in stocks in your VIAC 3a accounts. Personally, I used to be very aggressive with the 3a stock exposure on VIAC, but given the current situation and my (very personal) fear of an imminent crash, I rebalanced everything on cash. I might change it in the future of course.

19

Well, I don’t know exactly how it works from the insurer side, but basically you’re right from your point of view. There might be administrative differences (I mean, you don’t really pay groceries in 3b).

20

Nope, there is actually an official thing that is called 3b and tax deductible in certain cantons.

15 yrs ago or so your ”financial partner” would push you to buy this kind of stuff (I remember PostFinance did for me, hopefully I haven’t bought). Basically same setup as 3a insurance, a mix of this and that obscure investment scheme.