What is a Single Premium Life Insurance Policy and What Are Its Benefits?

A single premium life insurance policy is a life insurance contract with a cash surrender value in which the entire premium is paid upfront in a one-time lump sum, unlike traditional life insurance with regular (monthly or annual) premium payments. The invested capital can be allocated to conventional, unit-linked, or mixed investments, providing both financial protection and wealth accumulation.

What Tax Advantages Does a Single Premium Life Insurance Offer in Switzerland?

Under Swiss tax law, during the term of a single premium life insurance, the returns generated on the initial lump-sum payment are tax-free. This means that capital gains within the policy are generally not subject to income tax. As a result, it allows for tax-free capital growth, making the savings process significantly more efficient.

The payout of the life insurance benefit is tax-free provided the following conditions are met cumulatively:

• The policy was concluded before the insured reached age 66.
• At the time of payout, the insured has reached age 60.
• The policy has been in force for at least five years.
• The policyholder and the insured person are the same.
• The insurance provides adequate coverage for both survival and death benefits.

If all the above conditions are cumulatively met, the insurance payout is generally exempt from income tax.

For index-linked and unit-linked single premium life insurance policies, the minimum contract duration must be ten years. However, surrender of the policy, meaning early full or partial withdrawal of capital, is possible after just five years. In this case, the surrender value is generally tax-free, provided the other tax exemption conditions (as mentioned above) are met and there is no evidence of speculative intent.

What Happens if the Life Insurance Benefit Is Paid Out After the Death of the Insured Person?

In Switzerland, death benefit payouts from single premium whole life insurance or universal life insurance are not subject to income tax. However, if the payout goes to beneficiaries other than the surviving spouse or direct descendants of the insured person, inheritance tax may apply depending on the canton.

Can I Use My Securities Portfolio as the Single Premium?

Yes, this is possible. A securities portfolio can be contributed as a single premium. The portfolio is wrapped by the life insurance policy and may continue to be managed by an asset manager. From a Swiss tax perspective, such a policy is treated in the same way as one funded with a cash lump sum.

It may also be advisable to set up such a policy before a planned move within Switzerland. For purposes of meeting requirements regarding policy duration and the insured’s age, the relevant date is the time of policy inception.

I Am a U.S. Citizen Living in Switzerland. Does a Single Premium Life Insurance Offer Benefits for Me?

Since all U.S. citizens are subject to unlimited tax liability in the United States, it is essential to ensure that any single premium life insurance policy complies with U.S. tax law. Life insurance products are usually given favorable tax treatment in the U.S., provided the policy meets specific legal requirements.

In order to benefit from U.S. tax advantages, the following conditions must be met:

• Cash Value Accumulation Test (CVAT): The cash surrender value may not exceed the cumulative net premium, so that the product qualifies as life insurance for tax purposes.
• 7-Pay Test: To allow tax-free withdrawals and loans up to the amount of the paid premium (basis), the policy must pass the “7-Pay Test.” This means that the single premium may not exceed the cumulative total of the regular premiums that would have been due during the first seven years.
• IRS Diversification Rules: The investments within the life insurance policy must comply with U.S. diversification requirements.
• Investor Control Doctrine: Under U.S. tax law, the insured may not be considered the beneficial owner of the investments inside the policy. This means the insured cannot make essential investment decisions, exercise voting rights, or withdraw funds before maturity.

It is therefore essential that the policy complies not only with Swiss regulations but also with U.S. tax law.

If all of the above requirements are met, income from the policy in the U.S. will only be taxable when received as a payout during the insured’s lifetime. In the event of death, when the insurance benefit is paid directly to beneficiaries, income tax or estate tax generally does not apply.

At LINDEMANNLAW, we advise individuals and families on the legal, tax, and financial aspects of single premium life insurance policies and estate planning. If you are considering this type of insurance or would like to understand its implications for your personal situation, our experienced attorneys are here to help.

Contact us today to arrange a consultation and receive tailored advice for your financial and estate planning needs.