How does a private placement life insurance solution work?
Before you take out a life insurance policy, your investable assets are held in an investment portfolio with a private bank, and the investments’ returns are taxed annually. When you die, these assets form part of your estate and transfer to your heirs in accordance with the applicable inheritance laws.
After taking out a private placement life insurance policy and the transfer of your investment portfolio (or payment of the premium in cash) to the life insurance company, you become a policyholder. The life insurance company opens a dedicated account at a private bank for the underlying assets of your policy.
Jointly with the life insurance company and your multi-family office, you select an investment strategy according to your risk profile, and the bank manages that account on behalf of the insurance company; alternatively, you appoint the multi-family office as the asset manager who will be responsible for all investment decisions. From that moment on you will only be indirectly entitled to the performance of the investments as a beneficiary of the insurance policy as the life insurance company has now become the legal owner of the investable assets.
The investable assets are no longer considered your own assets as a result of the transfer and you will only have to pay income tax on the proceeds of the policy (i.e. the investments) when the life insurance pays out to you (i.e. tax payment is deferred). In a considerable number of countries (mostly in Europe) there are also other tax benefits, such as an exemption of wealth tax and lower income tax rates on pay-outs made during your lifetime, and no inheritance tax is due on the value of the policy at death*.
In order to make the life insurance policy financially attractive, the death cover of the insurance in most private placement life insurance policies is reduced to the absolute legal minimum, which results in relatively low product costs (costs of insurance). The private bank used by the insurance company to deposit the assets (custodian bank) is often the same bank that held your investment portfolio. In most cases, the portfolio management department of that bank will manage the investments as of the moment that you have changed to private placement life insurance, or your family office will act as the asset manager.
* The tax consequences of a life insurance are different for every country.
Private placement life insurance offers strong and compliant wealth protection
If the life insurance solution is set up correctly (meaning that the policy is set up tax compliantly and not simply used as a wrapper), your investable assets will be completely separated from your other assets, resulting in solid asset protection. Because the life insurance company is registered as the owner of your investable assets and as the ultimate beneficial owner of the account, your privacy is also protected. The contributed assets are not affected should the insurance company or the custodian bank go bankrupt, as they are separated from the risk sphere of the insurer and the bank**.