Life Insurance Policy Loans in Switzerland

Life insurance policy loans leverage the cash value of permanent life insurance policies as collateral. Because of this, the annual interest rates are typically much lower than those of personal loans. In this guide, moneyland.ch answers key questions about life insurance policy loans.

1. What is a policy loan?

Policy loans are typically open-ended, secured loans which are collateralized by the cash value of permanent life insurance policies. The mixed life insurance, savings insurance and retirement insurance sold by Swiss insurance companies are all varieties of permanent life insurance and build life insurance cash value. When you get a policy loan, you do not actually borrow the money making up your cash value, but simply pledge it as collateral which the lender can claim if you are not able to make your interest payments.

2. How can you get a policy loan in Switzerland?

Swiss life insurance providers including Allianz, Generali, Helvetia, PAX, Swiss Life, Vaudois and Zurich offer policy loans secured by the cash value of life insurance policies which they issue.

Some Swiss banks offer specialized policy loans which can be secured by any Swiss life insurance policy. Other banks may accept life insurance policy pledges as collateral against personal loans or Lombard loans even if they do not offer specialized policy loans.

It is important to note that although policy loans are secured, insurance providers and lenders may deny applications if your creditworthiness is very poor. As a general rule, the maximum loan cannot exceed a percentage of the cash value. For example, Helvetia allows policy loans worth up to 80% of life insurance cash value. The Obwaldner Kantonalbank provides policy loans worth up to 90% of cash value.

3. Which life insurance policies are eligible?

Only life insurance policies which fall under the Swiss pillar 3b category can be used to obtain policy loans.

Life insurance policies based on the 3a and 2a (vested benefits) retirement-savings categories are not eligible because access to their cash value is restricted. However, 2a and 3a life insurance policies can be pledged as collateral against mortgages for indirect amortization.

4. What are the advantages of policy loans?

The interest rates charged for policy loans are typically lower than those charged for unsecured personal loans. Currently, the Obwaldner Kantonalbank charges 2.75%, Helvetia charges 3%, Generali charges 3.5% and Allianz charges 4% variable interest per annum on policy loans. That is significantly less than the interest charged for personal loans, as the interactive Swiss personal loan comparison shows.

Unlike personal loans, policy loans are not normally amortizing loans. Unless otherwise stipulated in the loan agreement, you do not normally need to repay the loan within a specific time frame. You can pay off all or part of the loan whenever it suits you. If you do not repay the loan by the time your life insurance policy matures, the outstanding debt will be deducted from the insurance benefit before it is paid out.

Policy loans provide a way to access the capital tied up in your life insurance policy without surrendering your policy and losing your insurance coverage.

You continue to earn interest on your policy’s cash value after taking out a policy loan because you do not withdraw the money or put it on hold but simply pledge it as collateral.

5. What are the disadvantages of policy loans?

Unlike the interest rates of personal loans, which remain the same over the life of the loan, policy loans typically have variable annual interest rates. The insurance company or bank may raise (or lower) the interest rate on an ongoing basis, making the total cost of the loan difficult to calculate in advance.

You pay interest on the outstanding debt until it is fully repaid. Interest is charged on a monthly, quarterly, semi-annual or annual basis (depending on the lender and loan agreement). The longer you wait to repay the loan, the more interest you will pay, so amortizing the loan as soon as possible is recommended. If at any point your policy’s cash value no longer covers the amount owed (due to failure to meet interest payments), the insurance provider can have you surrender your policy to repay the debt.

If the loan is not repaid, the loan principal – along with any outstanding interest charges and incidental fees – are deducted from the insurance benefit. This results in the beneficiary (yourself in the case of living benefits) receiving a lower benefit when the policy matures.

6. When does getting a policy loan make sense?

Policy loans provide a means of accessing capital at relatively low interest rates. This makes them a good solution for refinancing more expensive personal loans or credit card debt. Because policy loans do not have amortization schedules, they are also a good financing option if you need flexibility in repaying your loan.

Note: Permanent life insurance is a relatively secure savings and investment instrument, but they come with high administrative costs. In most cases using a combination of term life insurance and savings accounts is a more favorable move. Policy loans are only useful if you already hold permanent life insurance policies and would lose money by surrendering these.

More on this topic:
Personal loan comparison
Term life insurance comparison
Mortgage comparison
Permanent life insurance in Switzerland explained
Term life vs. mixed life insurance