I write here to set out my thoughts on the use of life insurance as an investment vehicle, in the Russian context. Clients of all the jurisdictions invariably seek to optimise their tax position in which they operate. This includes holding assets that are so-called passive investments. There is a long history of legal systems giving tax benefits to life insurance schemes, and this is usually further enhanced by international life companies locating in low – tax jurisdictions wherein they themselves pay little or no tax on corporate profits.
Multi-generational, multi-national wealth management
The principal purpose of life insurance is the protection and preservation of assets for the next generation and for us, as wealth managers, this makes them a key tool in multi-generational planning – including situations where family members in succeeding generations are dispersed internationally. It is Conducting tax planning in respect of eventual withdrawals from a life policy is important, and there are a number of ways to do this. Life policies are either “off the shelf” sold as a package including the legal structure, dealing platform, custodianship and administration; or they are bespoke – known as Private Placement Life Insurance, where clients piece together the custodian, brokerage service, legal structure, and administration. This latter structure can often accommodate illiquid assets, such as real estate, art and other collectibles. Additional benefits of the life policy then come to the fore: confidentiality of ownership, amalgamation of accounts, ease of access to income or to capital, and portability.
Tax Optimisation
In the modern context, life companies hold client assets in segregated funds and do not conduct other classes of business, such that, combined with robust regulation, counterparty risk between a client and the insurance company is practically non-existent. The life company operates in a very similar way to a trust and is able to purchase and hold a whole range of financial assets for clients. Within the life policy, the assets grow tax free on capital gains and income, which means that the benefit of compound growth extends to one hundred percent of each year’s returns. The eventual impact on the returns from a diverse portfolio are significant over time and clients are attracted to this.