Your guide to insurance and why high net worth individuals in the UK are increasingly waking up to its advantages.
Life insurance may not immediately spring to mind when one is thinking about wealth management tools, but high net worth individuals in the UK (and internationally) are increasingly waking up to its advantages. Life insurance policies, when offered by specialist providers, can be tailored to precisely suit your purposes, allowing you to grow and protect your wealth tax-efficiently. Additionally, a tailored life insurance structure may also be particularly important if you are a business owner and so require firm business succession plans – such as buy/sell agreements – in place.
How it works
Life insurance can actually be a vital addition to a wealth manager’s toolkit, and if used cleverly can make a real difference to the protection and preservation of your family’s assets. Bancassurance, the distribution of insurance products through banks, is therefore a popular offering among institutions.
Life insurance has many wealth management applications, and can be very powerful when used in combination with other structures like trusts. Life insurance tends to differ in application quite widely according to the countries concerned, however, and there are many subtleties a wealth manager will be able to guide you through. In Europe, for example, insurance products tend to be called wrappers and are typically used to shield portfolios from current income taxation; these types of products tend to be weighted more towards investment assets with death benefits figuring lower, yet policies can be geared towards a number of needs.
Below are just a few of the ways life insurance could figure in your wealth management plans. Whatever stage of life you are currently in, consider adding life insurance to the strategies that you might like to talk over with a professional financial adviser.
Types of insurance policies
- Whole-of-life/term life assurance – As their names suggest, whole-of-life policies cover a policyholder until such point they die, whereas term life assurance means the policyholder’s life is insured for a set period, with a payout due only if they die within the term of the policy. As might be expected, whole-of-life policies are generally the more expensive option.
- Endowment – This is where an insurance policy is designed to provide a specific benefit to a policyholder’s family on death, such as a lump sum to pay off the remaining mortgage on a property.
- Investment – This is where the policy provides for investment as well as protection, with the insurance premiums paid being invested for the future benefit of the policyholder and any other beneficiaries. Unit-linked bonds, distribution bonds and with-profits bonds are among the options here.
The latter product is really a type of investment fund which gives insured parties a share of the returns generated from investing insurance premiums; the death benefit which is paid out can either be a lump sum or the value of the investment vehicle.
Possible applications
- Estate planning and IHT mitigation
The Inheritance Tax net continues to widen in the UK as rocketing house prices continue to push individuals above the £325,000 nil rate band, possibly leaving their estate to suffer a punitive 40% tax on assets above this level. This has led to a big uptick in demand for what are known as “pure death benefit” life insurance policies which allow the beneficiaries of an estate to settle IHT bills at once, rather than being forced to sell up a family residence, for example. (There are of course many other IHT mitigation strategies your wealth manager might be able to implement too.)
- International investors
International investors may find that what are known as private placement life insurance policies in the US (and as investment bonds more usually in the UK) can be particularly useful, since they can help individuals shelter their wealth from tax liabilities if they are moving between countries; therefore, it is commonly used by advisers in the pre-immigration phase of planning around a client’s move. Private placement life insurance allows a gross roll up or a tax deferral within an investment portfolio, typically over the duration of a mid-term relocation, but also with permanent country changes too – making them very useful for those looking to mitigate Income Tax while they are internationally mobile.
Private placement life insurance, which already is very well-established as a solution for affluent individuals in the US and Asia, has many applications depending on the jurisdiction(s) in question. These structures can, for example, be highly effective in the management of trusts where beneficiaries live in different countries, or when non-US trusts have US beneficiaries (here, the tax rates can reach up to 100%, although US-compliant wealth structuring can require very specialist expertise). There are also insurance solutions for non-domiciled investors who are UK resident and paying tax on a remittance basis.
Other tax-efficiencies
In the UK (as in the US) there is a requirement that investors use certain kinds of collective investment vehicles in order to access lower Capital Gains Tax rates. Those who would like to invest in a more esoteric investment vehicles (i.e. those which don’t report in the mandated way) without incurring the higher rate tax can deploy private placement life insurance to help them defer the tax liability on their investment portfolio and keep their income tax bill down.
While life insurance may not be hugely well known as a wealth management tool among the general public, investors can be reassured that it is a perfectly legitimate and accepted planning tool which is recognised by regulators. Wealth managers, for their part, are highly cognisant of the benefits life insurance can offer for sheltering assets from tax liabilities, as well as for providing security for your family after you are gone. Really, however, combining insurance and investment strategies is simply about making your money work as hard as it can in every possible instance – which is the essence of professional wealth management services.
It’s fair to say that life insurance, wills, IHT and even pensions all come under the banner of things people would really rather not think about. Yet if you talk things over with a wealth manager you may be surprised to learn just how many really effective ways there are to get peace of mind over your financial future, and that of your whole family.
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