Investors in the retail and mass affluent wealth segments in Asia have long embraced the use of investment linked life insurance, but why not high net worth investors?

Paul Rust is managing director of Hong Kong-based consultancy GWS Asia. Here he tells WealthBriefingAsia how private clients can reap rewards through combining life insurance with private banking custody. His views are his own and not necessarily endorsed by this publication.

Investors in the retail and mass
affluent wealth segments in Asia have long embraced the use of investment
linked life insurance, but this has so far rarely taken up by high net worth investors.

This is partly because less
affluent investors do not usually get access to the flexible custody platform
and execution capabilities provided by private banks, and have therefore used
life insurance “wraps” to hold and transact their investments.

But wealthy investors and their advisors are
starting to appreciate that life insurance can also provide considerable
benefits at the high end of the market. And life insurance companies have
created specific products and fee schedules to accommodate this. By combining a
life insurance policy with a private banking custody account and asset
management capabilities, private clients can reap considerable rewards.

How does this work?

The life insurance company will open an
account with a private bank of the client’s choice. The client will transfer
cash or assets to the life insurance company as payment of premium, and the
life company will issue a policy to the client. The life company will then
transfer the cash and assets to the private bank for management. The life
insurance company will be the owner of the private bank account, and the
beneficial owner of the assets. The client will be the owner of a life
insurance policy the value of which is linked to those assets.

What are the benefits?

Unlike trusts and foundations, which have
their roots in fundamentally different legal systems, and which are increasingly
viewed with suspicion by tax authorities, life insurance is globally recognized
and widely understood. Every major jurisdiction has rules governing life
insurance, and a system for taxation of life insurance. The skill, as in all
planning, is to understand those rules and how they can be applied to given
situations to achieve optimal benefit.

Asian investors are renowned for a high
need for control. The owner of a typical life insurance policy can choose when
to add assets and when to withdraw assets from the structure. He can determine
where the assets are to be held, and how they are to be managed. He can
nominate and change beneficiaries as he chooses, and no beneficiary has a right
to information, accounts, or any reporting - only to receive payment on the
death of the final life assured. The policy owner can nominate and change
beneficiaries as he wishes, without any requirement for their signature, knowledge,
or consent.

A policy can be owned by one or more
individuals, by a company, or by any one of a number of legal arrangements. A
policy can have multiple lives assured to give it maximum duration. And
beneficiaries can be individuals, companies, foundations, trustees, and, again,
a host of structures and arrangements.

In addition to the succession planning
benefits, life insurance can also provide other significant advantages. In
certain jurisdictions life insurance is protected from creditors in the event
of bankruptcy, from claims of a spouse in the event of divorce, and from other
claims. In many countries the income and gains arising from the assets held
within a policy are free of all taxation. Proceeds of life insurance are often
free of tax, or taxed at reduced rates. And in most civil law countries the
proceeds of life insurance are not considered part of one’s estate, and will
therefore avoid forced heirship provisions.