Protection for Life

Pure life insurance is primarily used to protect a family or a company in the event of death when an individual decides on a lump sum amount to provide for their family or for a chosen beneficiary; a bit of cash security can certainly help to ease the burden of bereavement.

A company usually likes its directors to take out a life insurance so that in the event of any director’s death they get a lump sum to reinvest in somebody else to take over the position, or add cash to company development projects. Sounds harsh and a bit heartless, but it’s business.

At a different level, life insurance is often used as an investment planning tool and sometimes it’s smart for a wife to be the owner of a life insurance taken out on her working husband’s life… in the event of his death she gets paid the lump sum, which in many jurisdictions is non-taxable because it belongs to the owner of the policy.

Wealthy people who are exposed to Inheritance Tax on death often take out a life insurance sum which will cover the government tax demand and therefore not strip the family of valuable cash assets needed for everyday life, or expose them to having to sell other assets in order to cover the tax bill.

A simple life insurance lump sum pay-out is often set up so that the living family have immediate cash to live on, and on these occasions the policies are normally written ‘in trust’. This avoids probate, whereby the dead person’s assets are subject to a court hearing, and may not be released for months or even considerably  longer.

International Life Insurance companies have for many decades set up investment structures which not only give investors access to a variety of unit trusts or mutual funds or investment trusts worldwide, but also allow the internal buying and selling of these investments by the client without being exposed to Capital Gains Tax (CGT). The point being is that if an individual bought an investment fund directly on the open market and then made a healthy profit above a certain amount, they would be subject to CGT if they then sold the asset on. However, under the umbrella of a Life Insurance Company Portfolio Bond, the selling of an individual fund which has made a massive profit has no liability to CGT for the holder of that life policy.

The withdrawal of cash from an insurance Umbrella structure is exposed to income tax in many jurisdictions, but usually there is a percentage amount that may be withdrawn annually which is non-taxable. These Life Insurance investment policies are not subject to CGT, which means that an individual can spread their holdings between Life Insurance policies and direct holdings to maximise their non-taxable withdrawal amounts.

As an example, a British expatriate retiring back to the UK, taking out a Life Insurance Investment Policy can withdraw 5% of the initial invested amount annually without any income tax being applied, and then invest in a number of UK onshore unit trusts which would not be exposed to CGT up to a certain annual limit – currently £11,000. In other words with £500,000 invested in a life policy, he could withdraw £25,000 per annum plus his £11,000 allowance, giving him a tax free income per year of £36,000 as a starter pack – assuming the unit trusts give a high annual profit!

The life policy can have an additional life insurance amount attached to it, written in trust to family beneficiaries, and retirement can be a neat affair from a cash flow point of view. Then again, the British expat in this case might prefer some place in a tropical paradise away from the cold and rain of Britain to lounge on a beach and while away his time. In this case he would not be subject to any Income Tax or CGT from the UK authorities, and if his policies and investments are set up smartly, he could live the life of luxury, mostly unhindered by taxation, even in his retirement jurisdiction.

On the other hand, if he is a US citizen, ‘Uncle Sam’ wants to tax him on his worldwide assets even if he lives permanently away from the shores of the USA. US citizens do have access to ways and means of substantially reducing this exposure to tax – avoidance being the name of the game, and not evasion.

Every nationality has different issues, and it is essential to get proper and detailed advice from a chosen lawyer, accountant and Financial Advisor before jumping in the deep end.