Insurance-based wealth management products deserve more attention than they receive due to robust asset protection qualities and ease of use, the financial industry says.

Editor’s note: The role that insurance products, such as private placement life insurance, can play in wealth planning and asset protection is not widely understood but at a time when high net worth investors are seeking shelter from rising taxes, this sector deserves closer attention. In the coming weeks, this publication intends to explore this area and, as always, values reader comments.

The wealth management industry needs to wake up to the tax-efficient and robust products of life insurance as governments turn the screws on high net worth individuals, a conference in London was told yesterday.

Life insurance products, so long as they comply with rules, are one of the “last bastions of tax avoidance” and are also important asset shields, said Joseph Field, a senior lawyer at Withers, the international law firm. He was speaking at the Life Insurance & Annuities for Private Clients event, hosted by IBC Global Conferences.

“If you obey the rules, the upside for the US and other countries is almost limitless. There is a very strong future for these products but it [the market] will have to be very transparent,” Field said.

"This is a highly technical area and you cannot cut any corners," Field continued. Another attractive feature of insurance, considering the dangers of regulatory over-reach, is that the power of the insurance lobby in countries such as the US and France is very strong, he said.

And his view was echoed by Leslie Alexander, a former US ambassador, who said that insurance-related products provide a legitimate route for wealth protection. Alexander has held various posts in nations including Haiti, Mauritius and Ecuador. He is now special advisor to Prime Advisory Group, a firm advising wealthy private clients.

“For these and other reasons, private placement life insurance provides a secure way to protect wealth. Smart money is going to seek shelter in safe and legitimate shelters as financial storms continue,” Alexander said.

The unfulfilled potential of insurance-wealth insurance services is vast, according to Scorpio Partnership, the consultants. In a report last year, Scorpio said demand for high net worth offshore insurance-linked investment in emerging markets was both large but also under-served by private banking firms. It estimated that less than 5 per cent of all wealth management portfolios in emerging markets included an insurance component. If that share rose to 15 per cent in five years, this would create a market of almost $1.2 trillion.

A number of firms operate in this space, such as Swiss Life and Southpac Life. 

To illustrate how PPLIs work, Swiss Life Private Placement gave this example in a recent article for Middle East Insurance Review: If, say, a UK person wants to secure his assets but retain his existing asset manager, he can buy a UK-compliant PPLI policy, which insures his life, with his wife as policyholder and beneficiaries being the wife and children. Assets are transferred to an account in the insurer’s name but with the client’s chosen bank. When the man retires, withdrawals can be made regularly; some 5 per cent per annum of initial investment can be withdrawn free of income tax and carried over into the future if unused. Asset growth is free of income tax. The share paid to children is free of inheritance tax as the wife is the policyholder. The client will have strong security if, for example, the client’s bank is in a jurisdiction such as Switzerland.

FATCA

The benefits of insurance-linked wealth structures becomes particularly significant for persons such as expat US citizens, as onerous new legislation, known as FATCA, is piling costs onto financial institutions dealing with this population group, the conference heard. Insurance could mitigate some of the pain this legislation causes, it heard.

Under FATCA, which was signed into law last year, non-US financial institutions of all kinds, ranging from banks to funds, must pay a 30 per cent withholding tax to the US Internal Revenue Service unless such FFIs enter into an agreement with the IRS to identify clients and their assets.

As a result, a number of firms, such as Société Générale, have told this publication that some businesses will no longer handle clients from the US because they are increasingly burdensome. On the other hand, some institutions, such as RBC Wealth Management, have targeted expat US citizens as an important client channel.

By a quirk of the rules on insurance, a US-based insurance policy, or policy sold by an offshore business which falls under US law, can be used by a US expat so long as assets of the client meet certain criteria, such as high diversification and avoidance of director investor control of assets, the conference heard.

Among other topics, US Ambassador Alexander highlighted potential threats to client privacy stemming from the recently signed US Tax Information Exchange Agreement with Panama. One of the features of the deal has been how documents exchanged between these jurisdictions cannot be redacted. The TIEA's other concerning feature is how information about "third countries" can be provided via this TIEA, he said. 

Another worry, the diplomat said, is how tax information sharing agreements could be abused - an issue that has also been raised by organisations such as the Society of Trust and Estate Practitioners, or STEP. "There is a darker side of how some governments use tax laws to settle political scores," he added.