Term Life Insurance vs. Mixed Life Insurance

Life insurance can be divided into two broad categories: term life insurance and permanent life insurance. In Switzerland, permanent life insurance which combines term life insurance with a cash value saving or investment instrument is known as mixed life insurance.

1. What is term life insurance?

As its name implies, term life insurance covers the risk of your dying over a predefined insurance term. If you die within the insurance term, the insurance company pays out a benefit. If you do not die within the insurance term, the insurance company does not pay out a benefit.

A number of different term life insurance models are available in Switzerland. You can choose between pillar 3a or pillar 3b term life insurance. You can also choose between constant benefit and decreasing benefit life insurance. Some offers have fixed premiums over the full insurance term, while others have rolling premiums which can change every year.

The one thing that all term life insurance offers have in common is that they only insure against the risk of death. They do not accumulate cash value and so cannot be used for savings or investment.

You can compare Swiss term life insurance offers using the term life insurance comparison on moneyland.ch.

What are the advantages of term life insurance?

The main advantage of term life insurance is that it is generally cheaper than mixed life insurance. It is generally the most affordable way to protect your dependents against financial risks associated with your dying unexpectedly.

Term life insurance is generally simple and transparent. If you take out term life insurance under the pillar 3a (tax-privileged private providence), you can deduct the insurance premiums from your taxable income as part of the pillar 3a tax deduction.

What are the disadvantages of term life insurance?

A possible disadvantage is that Swiss insurance providers do not currently offer return of premium term life insurance. This means that in the hopeful event that you do not die within the insurance term, you do not get back any part of your insurance premiums you paid.

2. What is mixed life insurance?

Mixed life insurance is the term used in Switzerland to refer to life insurance which combines term life insurance with cash value life insurance. This type of permanent life insurance includes term life insurance which pays out a benefit it you die within the insurance term. It also includes a life insurance cash value component which pays out a living benefit if you do not die during the insurance term.

This insurance is known as mixed life insurance because it includes both a fixed death benefit and a living benefit. This sets it apart from pure term life insurance which only has a death benefit, and from other kinds of permanent life insurance which are primarily savings or investment instruments (cash value only without a fixed death benefit).

What are the advantages of mixed life insurance?

A possible advantage of mixed life insurance is that you may get part or all of the premiums you pay if you keep the policy for the entire insurance term and pay your premiums without fail. There is a chance that the cash value you get paid out as a living benefit at the end of the term may be as high or even higher than the total premiums you paid. In this case, using mixed life insurance can work out cheaper than using term life insurance.

However, whether the living benefit covers the cost depends on many factors such as interest rates or returns on investments over the insurance term, and whether or not the insurance provider pays out life insurance dividends.

As with all other providence solutions available under the pillar 3a, if you get pillar 3a mixed life insurance, you can deduct the premiums from your taxable income as part of the pillar 3a deduction.

What are the disadvantages of mixed life insurance?

As with other types of permanent life insurance, there are primarily disadvantages to using mixed life insurance.

The insurance premiums are high in relation to the death benefit. This is because only part of the premiums pays for the term life insurance, while a portion goes towards building cash value, and part goes towards administrative costs.

Mixed life insurance is generally very inflexible. You are bound to paying insurance premiums regularly. Once you take out mixed life insurance, you must keep it for the length of the insurance term. Suspending mixed insurance before the end of the term will almost always result in a financial loss. With many mixed life insurance offers, you lose the entire accumulated cash back when you surrender the policy within the first several years.

While mixed life insurance is a relatively secure savings instrument, savings accounts and retirement accounts are equally secure and offer far much more flexibility. Unlike a mixed life insurance policy, you can migrate between savings accounts at any time without losing any of your assets.

For investing, the high costs of many mixed life insurance policies make them an expensive alternative to investing directly (in ETFs, for example) using cheap online trading services. For the less investment-savvy, using a low-cost asset management service or robo advisor is generally a better financial move. For retirement planning, a digital retirement asset management service or retirement fund provides a much more flexible alternative to mixed life insurance.

3. Conclusion

As a general rule, keeping insurance and saving separate is more favorable than mixing life insurance and saving.

Mixed life insurance is often marketed as a tool for lowering your taxable income. In actual fact, you get the exact same pillar 3a tax benefits by using stand-alone pillar 3a term life insurance in combination with stand-alone pillar 3a savings accounts, pillar 3a retirement funds, and pillar 3a retirement asset management services.

If you want to protect your dependents against the risk of you dying, pure term life insurance is a much more flexible option. You can compare Swiss term life insurance here.

Many insurers give you the option of adding supplemental disability insurance to mixed life insurance policies. Here too, getting stand-alone disability insurance gives you more flexibility, as opposed to combining different insurances.

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