Unit-linked life insurance as a wealth planning solution

The COVID-19 pandemic and its effect on the global economy has changed the wealth and tax planning landscape for taxpayers.

In this context, Unit Linked products are an interesting alternative in wealth planning, by means of a life insurance contract linked to an investment portfolio, in which the policyholder assumes the investment risk of the premiums paid.

Costumers who take out a Unit Linked life insurance policy domiciled in Luxembourg can benefit from unique protection in Europe, through a mechanism known as the “Triangle of Security”.

In this section, several experts from insurance companies in Luxembourg share their opinion on how this type of product can contribute to the design of an adequate wealth, estate and succession planning.

Comillas SFF

“The Luxembourgish Unit Linked life insurance policy offers many asset protection and succession planning advantages which make it an interesting alternative to SICAVs. To understand its philosophy, we can say that it is a savings product based on a life insurance policy, with one or several portfolios of securities, which can include a large selection of underlying assets, not simply just UCITs.

The Luxembourg Unit Linked offer is adapted to Spanish law but benefits from the security of Luxembourg asset protection thanks to the Triangle of Security. This mechanism requires that the underlying assets linked to each insurance policy be deposited in a segregated account of a depositary bank authorised by the insurance company and the Commissariat Aux Assurances (CAA).

The policy, which responds to Spanish regulations, allows for a deferral of personal income tax so that tax would not be applicable on the policy’s earnings in the absence of a redemption. In addition to this deferral, the contract is not subject to the “exit tax” either.

The fact that the Luxembourg Unit Linked policy is a life insurance policy, allows the policyholder to freely designate the beneficiaries of the insurance contract at any time, It should also be taken into account that the value of the insurance contract is not part of the receivable estate and therefore the beneficiaries can be other individuals than the legal heirs.

One other important aspect to consider is the confidentiality offered by the policy due to the fact that, unlike a will, the details of the insurance contract do not become public upon death. The fact that the policy is unit linked also allows quick access to liquidity, which allows the beneficiaries, for example, to face the payments of the Inheritance and Gift Tax (ISD) on the remainder of the inherited estate.

Finally, in addition to the advantages mentioned above, the Luxembourg Unit Linked insurance policy allows for numerous possibilities of deferral of the ISD as well as the prospect of having a certain level of control over the transfer of assets, so that the policyholder, may benefit from a greater freedom when disposing of the wealth which transmits through the policy.”

Comillas SFF

“The Spanish General Budget approved for 2021 featured a rise in tax for individual taxpayers with higher incomes and significant wealth. For example, with regard to the savings tax base in the Personal Income Tax (which had a maximum rate of 23%), a new band was introduced from €200,000 which is taxed at 26%. And the government already announced a tax reform which will involve even higher tax pressure on high-net-worth individuals.

In this context, tax-deferred vehicles, which allow taxation on earnings to be postponed until a point of time in the future, are becoming even more attractive. Unit-linked products are the ideal vehicle for investing in accordance with a strategy selected by the client, also providing the investor with the benefit of deferral of Personal Income Tax and allowing different types of income and capital gains to be offset under the insurance policy. Only in the event that the policy is redeemed or cancelled in favour of the policyholder will the earnings generated become liable to Personal Income Tax as investment income.

As this is a life insurance product, it also enables estate planning tailored to each client, offering a broad range of options for organising wealth transfer under the insurance – on the death of the policyholder or even while the policyholder is alive if so desired – to the designated beneficiaries. The designation may also incorporate specifications on age restrictions for the beneficiaries or time limits for insurance claims.

Another benefit that makes Luxembourg-based unit-linked life insurance stand out as an interesting investment vehicle is that it offers considerable flexibility, enabling high-net-worth clients to invest in funds of any kind (including ETFs) and in hedge funds, private equity and other alternative investments.

Lastly, it is worth noting that investing in a Luxembourg-based life insurance policy enables the investor to benefit from the investor protection regime under Luxembourg legislation – one of the safest protection regimes in Europe – and to avoid, as far as possible, country risk or the risk of insolvency of the bank where the underlying assets linked to the insurance are held in custody.

In light of these factors, Luxembourg-based unit-linked life insurance remains a simple but effective solution for financial, tax and estate planning, offering multiple benefits to Spanish private banking clients, both from a succession and a tax deferral perspectives and in terms of investment security.”

Comillas SFF

“What makes an investment tool perfect for wealth planning purposes? An easy to use instrument which gives peace of mind for both the preservation and transmission of wealth. In the current international environment, it must also be easily portable and adaptable to the changing circumstances in case of relocation. And, it should most importantly be an investment tool offering a choice of underlying assets that can be perfectly tailored to the needs of the client. With this in mind, Luxembourg life assurance ticks all the boxes! 

  • Investments: A client has the choice between a dedicated fund (with discretionary management), a specialised insurance fund (with more involvement in the strategy, available in some jurisdictions e.g. Portugal), an internal collective fund or a wide range of external funds, managed by independent fund managers with excellent track records. The level of customisation and the investment universe depend on the client’s profile.
  • Inheritance planning/succession planning: Luxembourg life assurance is a natural choice with its fully personalised beneficiary clause and highly flexible structure.
  • Tax planning: Life assurance is designed as a long-term investment offering a favourable tax framework compared to a traditional portfolio.
  • Protection: Luxembourg offers a unique framework with: the Triangle of Security ensuring full segregation of the policyholder’s assets from the custodian bank’s own funds, the Super Privilege, which means that the policyholder is the first creditor in case of insolvency of the life assurance company.
  • Portability: At OneLife, we accompany our advisors and their clients in realising their relocation projects in the best way possible.

A Luxembourg unit linked life assurance policy is therefore without doubt an excellent – maybe even the best – wealth planning instrument to hold and transfer family wealth efficiently”. 

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