Life Insurance: Pillar 3a or Pillar 3b?

Most people immediately think of whole life insurance with cash value when life insurance and retirement saving categories are mentioned in the same sentence. But in Switzerland, pure term life insurance without cash value also falls into either the pillar 3a or the pillar 3b provident categories.

Many Swiss insurance providers offer both pillar 3a and pillar 3b versions of the same term life insurance with identical premiums and benefits. That can be confusing for many people. You may be wondering what voluntary retirement planning with the pillar 3a has to do with term life insurance, and how the category you choose affects your insurance coverage.

This moneyland.ch guide explains the differences between pillar 3a and pillar 3b term life insurance to help you choose the insurance that matches your needs.

What is pillar 3a term life insurance?

The pillar 3a is a Swiss category of voluntary financial planning that comes with both limitations and tax privileges. It is most commonly used to save for retirement on a tax-privileged basis. While term life insurance is not a retirement saving solution, using a pillar 3a term life insurance still lets you benefit from the tax advantages of the pillar 3a.

The Swiss term life insurance comparison on moneyland.ch shows you which offers are available in pillar 3a versions.

Advantages of pillar 3a term life insurance:

• The insurance premiums you pay for pillar 3a term life insurance can be deducted from your taxable income up to the legally-defined annual limit for pillar 3a contributions. The limit varies depending on whether or not you are subscribed to a Swiss occupational pension fund (pillar 2). Depending on your tax situation, claiming this tax deduction can save you a lot of money.
• The insurance benefits paid out to your beneficiaries are taxed separately from other income, and at a more favorable rate. The exact tax rates vary between cantons. This advantage applies to both pillar 3a and pillar 3b term life insurance.

Disadvantages of pillar 3a term life insurance:

• There are limitations that dictate whom you can name as the beneficiary. You cannot name just any person or organization of your choice as the recipient of your death benefit. The beneficiary must be an heir as per the rules for the pillar 3a.
• The insurance term of a pillar 3a term life insurance cannot extend past legal retirement age. If you want life insurance that will continue to insure you after you retire, then a pillar 3a policy is not a suitable option.
• The premiums that you pay for pillar 3a term life insurance use up part of your pillar 3a allowance that you could otherwise use for tax-privileged retirement savings.
• If, for a time, you do not earn an income on which you must pay OASI contributions, you will not be able to benefit from pillar 3a tax deductions until you earn an OASI-eligible income again. Additionally, your term life insurance provider may put your policy on hold or convert it to a pillar 3b policy if you stop earning an OASI-eligible income.

What is pillar 3b term life insurance?

The pillar 3b is a Swiss category of voluntary financial planning that does not special tax privileges. It does not have many limitations, so it offers more flexibility. The interactive term life insurance comparison on moneyland.ch shows you which offers are available in pillar 3b versions. Certain offers from some Swiss insurance providers are only available as pillar 3b policies.

Advantages of pillar 3b term life insurance:

• There are no restrictions with regard to choosing beneficiaries. You can name any person or organization of your choice as the beneficiary.
• The insurance benefits paid out to your beneficiaries are taxed separately from other income, and at a more favorable rate. The exact tax rates vary between cantons. This advantage applies to both pillar 3a and pillar 3b term life insurance.
• Many Pillar 3b term life insurance let you remain insured against the risk of death up to the age of 70 or even 80 years old. Pillar 3a life insurance, on the other hand, can only be kept until retirement age, at the longest.

Disadvantages of pillar 3b term life insurance:

• The premiums you pay for pillar 3b life insurance cannot be included in the pillar 3a tax deduction. You can account for the premiums in the tax deduction for insurance premiums and interest on savings. But this deduction is relatively small, and also applies to the premiums you pay for mandatory health insurance (minus premium reductions) and voluntary accident insurance, as well as interest you earn on savings. Depending on your situation, the remaining part of the deduction may only cover a fraction of your term life insurance premiums, or none at all.

Should I use the pillar 3a or the pillar 3b for my term life insurance?

If you are able to claim pillar 3a tax deductions, then using pillar 3a term life insurance can be cheaper than using pillar 3b insurance because of the tax deduction. If your purpose for getting life insurance is to protect your family against the risk of your passing away before retirement age, then using pillar 3a term life insurance can make sense, depending on your situation.

Exception: If you would otherwise use the full pillar 3a tax deduction to save for retirement, then doing so has more long-term tax benefits, compared to using the pillar 3a for term life insurance.

On the other hand, if you want life insurance that you can keep for some years after you reach retirement age, or if you want to name a beneficiary other than those whom the pillar 3a allows for, then using a pillar 3b offer gives you those options. You cannot claim the pillar 3a tax deduction for your insurance premiums. However, you can include your premiums in the tax deduction for insurance premiums and interest on savings, if the limit for that deduction is not already filled by your mandatory health insurance premiums.

The term life insurance comparison on moneyland.ch clearly shows whether a policy falls under the pillar 3a, the pillar 3b, or is available in both versions.

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