December 19, 2019
Life insurance is often an integral part of individuals’ wealth planning strategy. It can be used to provide a lump sum to your family in the event of your death, but also the payment of a capital sum or a regular income when you retire. It also has notable tax advantages over a standard investment portfolio.
When the policy reaches maturity, the policyholder or their designated beneficiaries receive a lump sum amount, plus any growth in the assets. If the policyholder dies before maturity, their designated beneficiaries receive either the amount accumulated, or the guaranteed amount, depending on the type of policy.
Income and capital gains
Life assurance contracts are made for clients looking for middle to long term investments and benefit from significant tax advantages in most countries. Whereas in a standard portfolio, selling assets and buying others results in capital gains tax liabilities, investors using life assurance policies can switch from one asset to another within the contract tax-free as long as there is no surrender. This enables growth in the portfolio to accumulate on a gross basis, without tax eating away at returns on the way.
Similarly, when no surrender, any income – from stock dividends or bond interest, for example – is added to the contract without incurring income tax.
Research by UK investment manager Schroders has found that an investor putting $1,000 into the MSCI World index on January 1, 1993 would have seen their capital grow to $3,231 by March 7, 2018, at a respectable annual growth rate of 5.9%. But by reinvesting all dividends, the same $1,000 investment would have grown to $6,416, representing growth of a stellar 8.3% a year.
Inheritance
When the policyholder dies, the lump sum payment usually sits outside the policyholder’s estate for inheritance tax purposes – meaning it is received by the intended beneficiaries without the need to wait for the will to be declared effective.
Tax neutrality
The tax treatment of policy proceeds varies according to the jurisdiction, but it usually compares favourably with that of a standard investment portfolio. Luxembourg life insurance contracts are designed to be tax-neutral – adapted to the policyholder’s country of residence. For non-resident policyholders, Luxembourg does not tax either premiums or capital gains arising at the end of the contract. This can be an important consideration for expatriates considering how to manage their wealth.
Life insurance contracts can be an important part of a client’s wealth and inheritance planning tools. Contracts can be shaped to the needs of each individual while ensuring an alignment with their wealth planning strategies.
We invite clients to get in touch with their advisor to analyse their personal situation and identify the most relevant solutions.
Key points :
- When no surrender, there is no taxation on capital gains income within the life assurance contract
- Any income generated from a life assurance contract (dividends, interest) is subject to taxation only upon total or partial surrender (tax deferral)
- Tax neutrality in Luxembourg
Our team of international tax and legal experts are available to help define efficient and personalised solutions based on the specific needs of clients. We support our partners in the development of innovative and tailor-made wealth solutions. Please contact us for any questions you may have.