Many people have life insurance. One of the best reasons for life insurance is if people are depending on your income. If you pass away or are unable to generate that income, the life insurance can come into play to help the people that are dependent on you. This will not last for life but can be of great help.
In most case, it is very difficult to account for your life insurance in your net worth. Indeed, unless you die, you will not get any money from the insurance. So it does not make sense to account for it as a value in your net worth. But there are different kinds of life insurance. In Switzerland, we have some special kind of life insurance that is linked to retirement. If you do not have any issue before retirement, you will get back most of the money. Therefore, it makes sense to account for this kind of life insurance in your net worth.
So, let’s see how to account for it!
Life Insurance In Switzerland
In Switzerland, there are special life insurances that are directly linked to the retirement system. In fact, my life insurance is not standard life insurance but a third pillar life insurance. This means that the life insurance policy is linked to retirement and the third pillar.
In Switzerland, the third pillar of retirement can be either in a bank account or in the form of a life insurance policy. The bank account option is the obvious solution. However, many people opt for a life insurance third pillar as well. This is a special form of life insurance. You will get some part of your capital back at the retirement age (65 years old currently). That means that once I reach this age, I will get back some money.
In the event of your death, your spouse will get the capital. Moreover, most of these insurance policies also cover the case where you cannot pay any more. Not if you stop paying, of course. But if you become handicapped or unable to work. In this case, the insurance will cover your fee while you can’t work.
I am not sure this is a good deal for everybody. But I think it is a good deal for me. Mrs. The Poor Swiss does not yet work and will not have a full retirement pension once she retires. Thus, if I pass away, she will have a good cover from my life insurance. For some people, it is also a good way to force them to contribute to their retirement savings. On the other hand, the returns on investments are very low compared to the returns from a third pillar invested in stocks.
We can get back on the main subject now. I pay 300 CHF each month for this insurance. Until now, I have always counted that as an expense in my budget. But, I now realize it is not really an expense. Indeed, once I am 65 years old, I will be able to get a lot of money back.
Therefore, expenses to my life insurance are very similar to the payments I do to my bank third pillar. And I do not account for these as expenses. This is an investment. So, I decided to remove this recurring expense from my budget. Since we are close to the beginning of the year, I also decided to remove it from January 2018 and February 2018. This means that my savings rate is better in these two months. It is now 33% in January and 4.2% in February. This is reflected on our Savings Rates page.
Currently, my Net Worth does not get better since the current value of the insurance is 0 CHF. If you take out the insurance in the early years, you lose everything. In fact, I will start accounting the insurance as Net Worth in September 2018. I believe this makes my accounting better and more accurate.
My life insurance policy does not tell me exactly how much it is worth right now. However, I have the information for each year since the signature and the retirement age. I can easily extrapolate the monthly values of my insurance to account for it each month!
If you have a life insurance policy yourself with a term, I encourage you to account for it in your net worth. This will make your accounting much more accurate. Moreover, if you intend to rely on your net worth to reach Financial Independence, you will have a better picture of where you are in your journey.
What about you? How do you account for your retirement life insurance? Do you have one?