January 5, 2018
What is a unit-linked insurance contract?
A “unit-linked” product is an insurance contract under which the policyholder bears the full investment risk of the underlying financial assets of the policy. Therefore, under “unit-linked” products, the performance of the investments is not guaranteed by the insurance company in the short-, medium- or long-term.
The “unit-linked” product allows policyholders to combine in an efficient manner, financial, succession and tax planning in a single contract which complies by default with the tax and legal framework of the jurisdiction in which the policyholder is resident in order to avoid any legal or tax requalification risk.
What are the relevant components of a unit-linked insurance contract?
The main components of a unit-linked insurance contract are the following:
- Policyholder(s): investor who subscribes, signs and pays the insurance premium. Could be an individual or a company.
- Insured person(s): risk element covered under the insurance contract. Could be one or several persons.
- Beneficiary(ies): person or entity that will receive the insurance indemnity upon the occurrence of the insured event.
- Asset manager: professional entity duly licenced in its home jurisdiction to perform portfolio management activities. The asset manager may be entrusted by the insurer to manage the financial assets on a discretionary basis under the insurance contract based on the investment strategy chosen by the policyholder at inception.
- Custodian bank: financial institution which provides custodial services in relation to the financial assets held under the policy(ies).
What are the main benefits of subscribing a unit-linked product with a Luxembourg insurer?
The main advantages of unit-linked insurance policies issued by Luxembourg insurers are the following:
- Asset protection: The Luxembourg authorities, and more specifically the Luxembourg Insurance Regulator, the CAA (Commissariat aux Assurances), have designed a unique scheme under which the assets of the policyholders are segregated off-balance sheet from the insurer’s and custodian bank’s balance sheet. As a result, in case of insolvency or bankruptcy of the insurer or the custodian bank, the assets of the policyholder remain fully protected from any ordinary creditors’ claims.
- Confidentiality: Luxembourg insurers and its professionals are fully bound by strict professional secrecy rules which ensure full confidentiality for the policyholders and any possible beneficiaries.
- Investment flexibility: Luxembourg investment rules allow for great flexibility as to the type of financial assets in which the premium contributed by the policyholder can be invested. It is not uncommon to observe how investment managers invest in alternative or hedge funds and private equity through Luxembourg life insurance policies in order to obtain higher yields.
What is the tax treatment of unit-linked products for Peruvian investors?
At inception, income tax applies to an effective rate of 2,1% on the risk premiums when the latter are paid to cover risks located within the Peruvian territory, are referred to Peruvian residents at the time the contract is signed or, are referred to goods or real estate located in Peru.
In case of partial or total surrender, any capital gain derived from the policy is currently exempted from Income Tax in Peru.
There is no Wealth or Equity Tax in Peru, thus, the value of the policy will not be taxed as such if held directly by a Peruvian tax resident.
In relation to life proceeds paid to a Peruvian resident beneficiary, please note that, in principle, insurance benefits triggered as a consequence of the death of the insured, shall be tax exempt. Should the beneficiary be resident outside of Peru, please note that different taxations may apply on the receipt of the insurance indemnity depending on the jurisdiction.
Other points to consider?
Yes, in order to avoid any requalification risk in Peru, it is highly recommended to embed substantial death cover in the product.
Should you need additional information in relation to unit-linked products for Peruvian resident investors, do not hesitate to contact our Sales representatives:
José Manuel Tara, Regional Director Iberia & Latam, at OneLife
Luis De La Infiesta, Regional Sales Director Iberia & Latam, at OneLife at OneLife
Gonzalo Garcia-Perez, Wealth Planner Manager for Iberia and Latam markets, at OneLife
Author: Gonzalo Garcia-Perez