Life insurance solutions are increasingly used by UHNWIs as a wealth planning structure for asset and investor protection, tax and estate planning, and/or as a private holding structure.
The policyholder contributes the assets that he or she wants to protect as a one-off premium payment, in cash or in kind, to a bespoke investment fund created by the life insurer. The life insurer opens a dedicated account at a custodian bank for the underlying assets of the policy.
The policyholder selects an investment strategy and nominates an investment manager. The life company formally appoints the investment manager. Usually, the custodian bank and the appointed investment manager are the same bank that held the investment portfolio before the premium transfer.
This internal investment fund is exclusively linked to the policyholder’s life policy. The value of the PPLI policy is equal at all times to that of the underlying internal investment fund.
The life insurer has now become the Ultimate Beneficial Owner (UBO) of the underlying assets. In return for the premium payment, the policyholder has a “claim” on the life insurer for the value of the underlying investment fund.
He can withdraw and/or surrender at any time during his life time, although surrender penalties may be applicable during an initial period of several years. Following the initial period, withdrawals or surrenders can be made penalty-free.
The policyholder only pays income tax – if applicable at all depending on the relevant jurisdiction – on the proceeds of the policy paid out. The tax payment is deferred since the life insurer is the UBO of the assets underlying the policy.
Upon the death of the life assured or the last of multiple lives assured, the Net Asset Value (NAV) of the underlying investment fund, increased by any death cover, will be paid out to the beneficiaries appointed by the policyholder (or to the estate of the deceased in some jurisdictions).
In order to keep the PPLI attractive, the death cover of the life policy is often reduced to the absolute legal minimum, ensuring a relatively low product cost.
