How does it work?
A few key points are critical for the understanding of how this basic structure creates considerable planning opportunities:
• The owner / account holder of the Policy Account is not the client. Instead, it is the insurance company. The client (or policyholder) has a private contract with the insurance company. All terms and conditions are reflected in the insurance policy, which defines rights and obligations for the two contracting parties. However, the insurer sets up and owns the Policy Account - NOT the client. This structure has substantial implications for planning, particularly in regard to privacy, taxation and asset protection.
• The concept allows for multi-jurisdictional structuring. In terms of asset protection and privacy, a multi-jurisdictional structure can be very powerful in protecting one's assets from plaintiffs and creditors. Contrary to the convoluted and expensive corporate and trust structures employed traditionally in the offshore world, the advantages of multiple jurisdictions can be integrated within one single insurance contract. For example, the client may be a resident of Germany or the United Kingdom. The insurance company will be domiciled in Liechtenstein. The bank and asset manager will, in the case of a "Swiss Annuity"- style structure, be domiciled and registered in Switzerland. Depending on the preferences and objectives of a client, this structural flexibility facilitates truly tailored solutions.
• The structure provides for multiple checks and balances. Contrary to offshore corporate structures and trusts, where you are required to entrust your affairs entirely in the hands of a trustee or board of directors, the insurance wrapper integrates the services of three institutional parties: the insurer, the custodian bank and, generally, a professional asset manager. This creates a high level of institutional security.
• Manifold investment and structuring possibilities "above" and "below" the policy. As portrayed by the chart above, there are a number of "moving parts" that can be considered in configuring your policy structure. The policy contract itself needs to define the policyholder (owner), the insured person(s) and the designated beneficiaries (to whom the death benefits are paid after the last insured passes away). It is noteworthy that the number of insured persons, with some insurance companies, is not limited. This obviously facilitates long-term generational planning.
"Above" the policy, one must consider whether ownership of the policy should be direct at the individual level, or whether a trust, partnership, or corporation should act as policyholder. "Below" the policy, the segregated account structure enables you to create a personally tailored investment portfolio, with your personal strategy that may involve equity, bonds, precious metals, commodities, mutual funds, ETF's, etc. Importantly, some insurers also allow for the inclusion of non-bankable assets. In other words, the structure allows for inclusion of real estate, art or private equity.
• Institutional and jurisdictional safety. The insurance, banking, and asset management laws of Switzerland and Liechtenstein apply. Furthermore, life insurance cover applies from the first day of the contract term.
• Liquidity. The policy can be surrendered in full or partially at any time. Payments can be made in a lump sum or as regular payments. The value of the assets held in the policy account will be paid to the policyholder or, in the case of death of the last insured person, to the designated beneficiaries. The payment is made in cash or in kind. In other words, the assets held in the policy needn't be sold for transferring the wealth. The policyholder may choose to pledge the policy in order to take out a loan. In most jurisdictions, this will create instant liquidity without any taxable consequences.
• Direct inheritance, separate of probate. The insurance companies in Liechtenstein will pay the insurance proceeds immediately upon death of the last insured person. Thus the payment is made efficiently, separate of probate. Beneficiaries needn't wait for the sometimes slow and tedious dissolution of the estate. Furthermore, the client is free to designate the group of beneficiaries, and to make changes to this at any time. When changing an irrevocable nomination, the consent of all beneficiaries is needed, of course.
• Unrestricted access to the universe of investment opportunities. Many jurisdictions around the world have rules that were supposedly set up for the protection of investors. For example, for Italians it is very difficult to invest in international hedge funds. US rules make it very difficult and legally risky for foreign companies to sell their securities and funds to Americans. Therefore, US persons are largely restricted to US-based investments. Obviously, sophisticated investors understand that it can be beneficial to diversify ones investment internationally, beyond the investments available locally. Based on the structure of the Portfolio, no legal restrictions to access all major world currencies, asset classes, and funds apply.
• Tax Benefits. In most jurisdictions, this kind of structure is tax-deferred, meaning that for as long as your assets are invested within the structure, no income taxes, capital gains taxes or withholding taxes will apply. With proper planning, additional tax benefits can be achieved. Depending on your tax domicile, estate taxes, gift taxes or value added taxes can be avoided in compliance with the law. For example, in jurisdictions like Germany, Sweden, the United Kingdom, or South Africa, these products benefit from considerable tax advantages.
• Asset protection. As discussed earlier in detail, based on Liechtenstein insurance rules (duress clause), solid protection from creditors and frivolous lawsuits is provided. The policy is a contract; it cannot be taken away except by agreement with the insurance company.