Hedging against Personal Risks

Personal risks invariably consist of a divestment risk or risk of giving up owner-occupation.

Possible causes are:

  • Loss of income / lower income
  • Death
  • Disability / inability to work
  • Early retirement
  • Unemployment
  • Divorce
  • Increased need for funds (to cover corporate loss, costly medical operation etc.)

Hedging options are classified as:

  • Risk protection
    • National insurance (Occupational Pensions Act)
    • Private pension plan (pillars 3a and 3b)
      • Whole-life insurance policy
      • Life insurance savings plan
  • Combination of risk protection and amortisation
    • Risk protection through private pension plan
      • for indirect amortisation by accumulating the insurance payments in a separate fund from which the mortgage can then be repaid in a lump sum in due course
      • Advantages
        • Deductibility of premiums (pillar 3a)
        • Interest on debt continues to be deducted
        • Special tax rate for insurance payment, separate from other income
      • using the insurance cover to pay off the mortgage
        • Customary: amortisation of 2nd mortgage
        • Less common: amortisation of all mortgage debts
    • Amortisation policy, possibly with exemption from payment of premiums in the event of incapacity for work

Further Information

  • Financing of owner-occupied property / risk protection and amortisation
    • Some lenders require the borrower to take out life insurance as a condition for financing (whole-life insurance policy, poss. life insurance savings plan) and to assign the conditional insurance claim or award of beneficiary status
  • Protection of spouse from property divestment according to the principle of preference
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