This article argues the case for private placement life insurance and similar tools to be adopted by wealth managers.

Life insurance is an important part of wealth management capability in Asia, and indeed other parts of the world. At this publication we don’t pull back from making this point. In the past, for example, we have described the uses (and abuses) of critical illness cover. In this article, Paul Rust, founder of GWS Asia Limited, an independent specialist in the field of private placement life insurance (PPLI), talks through some of these issues. The editors here are delighted to share these insights. Readers can respond by emailing tom.burroughes@weathbriefing.com or jackie.bennion@clearviewpublishing.com

For many years private banks in Asia have boosted revenue from traditional business by financing the purchase of universal life insurance, and receiving commission from brokers for product sales. For some of the bigger banks, possibly in excess of two hundred million dollars. 

The product has its critics, but its survival and continued growth through both good and bad times, has been nothing short of remarkable. It is unfortunate, however, that the offering has remained of such single focus, and that more eyes have not been prised open to other, more tailored, sophisticated insurance tools.

Regulation of the wealth management world has increased considerably during the last ten years. Taxation of wealth has become a priority for many governments, and transparency and cross-border reporting have become institutionalised. Industry surveys report that taxation is one of the main concerns of high net worth investors in Asia. Yet many players in the region have failed to keep pace. 

How many private bankers with clients in the Philippines, for example, can advise their clients whether portfolio losses can be offset against gains at the end of each tax year, or whether gains from currency trading is taxable? How many advisors with clients in mainland China know how convertible bonds, structured products, or stock dividends will be treated from a tax perspective? And how many wealth managers can answer a Taiwan client who asks about taxation of the dual currency deposits owned by his BVI company? 

Banks generally deflect these questions. Bankers are told to avoid conversations that might be construed as giving tax advice. The investor is instructed to take independent tax advice; mostly, and unfortunately, with an expectation that he, or she, will not. 

It appears that management of regulation and compliance is the Asian provider’s priority, and not tax-efficient asset management, as one might expect, and indeed would receive, in many European or North American financial centres.

So, why is life insurance relevant? 
If we move away from the single track of traditional universal life insurance we can access a world of many different variations of the theme. Variable universal life insurance, where a policyholder can direct how the insurance company will invest the premiums. Annuities, from which an investor can achieve a life-long flow of income. And private-placement investment-linked life insurance, where the policyholder can direct how premiums are invested, can protect against potential collapse of an insurance company, and can achieve trust-like benefits. And more besides.

Private-placement life insurance  
Private-placement life insurance is a legal contract of insurance, tailored to investor needs that can serve as a holding vehicle for generic “bankable assets”. These assets might not be efficient from a domestic tax perspective when held by a private investor, but can be perfectly sound, and sheltered from tax and reporting, when held within the life insurance envelope. 

A banker might be relieved to avoid questions about the taxation of individual assets when his or her client holds the portfolio within the shelter of a life insurance policy. The insurance company is the owner of the assets, generally with no adverse tax implications, and the client simply owns the policy. 
 
An offshore policy can be tailored to replicate the sort of policy a client can buy in his home market, but with pricing, flexibility, and a level of service appropriate to a high net worth international investor. 

Most countries recognise life insurance. All have regulations, tax, and other laws relating to life insurance. The skill is to take the best of what the local regulations provide, and tailor an offshore structure to take maximum advantage. 

Benefits in Asia
Several countries in Asia have legal systems of forced heirship, where assets must pass in a certain manner on death, but life insurance is generally excluded. Assets might therefore be held securely within a life insurance policy, protected against claims, and outside the estate of the client on death, avoiding forced heirship rules, probate, and possibly even taxation. A policyholder can usually add and change beneficiaries at any time, without informing those beneficiaries. 

Life insurance is often granted special status in bankruptcy and divorce, and, dependent upon the circumstances and the nature of the policy, might protect assets against losses and claims if a business fails, against government seizure, freezing orders, and other hostile action.

Some jurisdictions have CFC rules, which look through offshore companies, and attribute the underlying income to the owner of the company. Life insurance might be a better vehicle for holding these assets, allowing the policyholder to have complete control of asset management during his or her lifetime, avoiding CFC rules.

Investors might use life insurance to avoid or defer taxation of dividends and gains generated by the portfolio, and avoid reporting, either permanently, or until the envelope is opened. The life insurance company is the beneficial owner of the assets linked to the policy, and is therefore the owner of all income and gains. If the life insurance company is taxed at lower rates than the investor would be personally, or is not taxed at all, there should be a benefit.

Or an investor might simply wish to avoid the need to report income generated by specific assets which he or she does not wish to be widely known. A life insurance company must report the policy under CRS, for example, but will not report its individual underlying assets.

The future is bright
Insurance companies in Europe and the United States have been negotiating their way through economic and fiscal obstacles for hundreds of years and will continue to so. The social benefits for investors and governments are obvious, and products that dovetail with tax laws, assist pension planning, and generally achieve social benefits are numerous. Most Asian markets are not at that stage of development, but with careful planning, and proper advice, many opportunities exist to use offshore insurance to achieve substantial benefits, and meet the most pressing needs of wealthier families, often with less rigorous reporting and greater confidentiality than might otherwise be the case. 

As more high net worth investors awaken to the new world, and as more private banks develop their ultra-high net worth and family office offerings, and seek new ways of gathering assets and increasing revenue, private placement life insurance must surely feature.

About the author

Paul Rust is managing director of GWS Asia Limited, a Hong Kong insurance broker company specializing in private placement life insurance. Paul Rust is a 40-year veteran of the trust and estate planning industry, over 25 years in Asia. After 10 years managing the regional wealth planning function of a major Swiss private bank, Paul established the Asian presence of a Luxembourg-based life insurance company, and pioneered the use of investment-linked life insurance/privatbancassurance in the high net worth market. In 2009, Paul established GWS Asia Limited as the first independent, specialist PPLI broker in the Region, a niche that it largely retains.