Grundy, Milton: From the archive – February 2013

The topic of Life Insurance (more properly, Life Assurance) has featured many times at ITPA meetings (Joseph Field in Berlin, Eric Winter in Luxembourg, Patrick Way in Madrid, Michael Richardson in Cannes). It is not an easy topic for an international association, not least because the tax treatment of policies and their proceeds varies widely from jurisdiction to jurisdiction. But fundamentally, a life policy has the essential characteristics of a tax planning vehicle – that it serves as a barrier to the flow of income between the source and the taxpayer, as does a company or a trust. There are, moreover, many jurisdictions which do not tax income accumulated within the policy, and there are even high-tax countries which exempt from tax income accumulated for the benefit of non-resident policyholders (though the income may nevertheless attract treaty relief, and a cross-border policy can function as a discreet treaty-shopping vehicle) so that the income, instead of flowing to the taxpayer, and becoming part of his taxable income, is rolled up inside the policy.

Tax effectiveness of an insurance policy can be expressed with the formula A-(B+C), where A the tax which would have been paid by the policyholder if the income of the policy assets had gone directly to him, B is the tax on that income (if any) paid by the insurance company and C is the tax (again, if any) paid by the policyholder on redemption, adjusted to allow for the benefit of deferral. These figures can of course only be determined in retrospect, but they can be influenced by the choice of insurance company at the beginning, and gifts or settlements or change of residence at the end.

As many ITPA speakers have mentioned, the insurance policy is not without its problems: unlike the company or the trust, the policy assets are not ring-fenced (though Luxembourg offers some ring-fencing), and – perhaps for this reason – insurance companies are very conservative in their approach to investment. And then there are the costs: policies seem to be more expensive than other “barrier” vehicles. Some speakers have discussed – though more in their discussion groups than in their formal presentations – the possibility of the private insurance company: like the private trust company, it would deal with the investments of a single family – e.g. investing in the family or in “satellite” companies doing business with the family company. Have you, dear Reader, had any experience of this kind of vehicle? If so, can you be persuaded to write a short piece about it for the Yearbook – our online publication, or – if there is more to say – make a presentation at one of our meetings? If the idea appeals to you, please tell the Registrar.

Milton Grundy