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• Swiss Annuities and Life Insurance

Swiss Annuities And Life Insurance vs Asset Protection Trusts

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The merits of using an insurance policy as an alternative to a trust are sometimes overlooked, but this article, concerned with Swiss insurance policies for asset protection purposes, underlines this valuable option.

The special advantages offered by Swiss insurance policies in terms of asset protection represent the main theme of this article, which shows that Swiss annuities and life insurance policies can, in many circumstances, offer very attractive alternatives to asset protection trusts. The advantages are based on specific features of Swiss insurance law which makes Swiss annuities interesting alternatives to more complex, more costly and less secure asset protection structures such as trusts. Although this feature is particularly relevant to American investors, in other countries too, wealthy individuals and families are increasingly looking to protect their assets from frivolous lawsuits and unjustified claims.

Swiss annuities and life insurance can also be forms of investment that offer tax advantages, in many cases allowing significant relief from income, capital gains and inheritance tax. The capital accumulated in life insurance policies is not taxed in several countries when the policy expires, or then only at a very low rate.

Annuities and those life insurance policies which have an investment component can be divided into fixed and variable products. The term "fixed" means that the life insurance company guarantees the principal and a certain definite return on the investment, whereas in a variable annuity or life insurance contract the value of the insurance policy depends on the underlying investments which can be chosen more or less freely by the client. Such underlying investments typically consist of a portfolio of funds, stocks and bonds, but in specially structured insurance contracts may also include other assets, including unquoted shares of private companies and real estate.

Generally, Swiss insurance policies can be tailor-made in almost every respect to suit the most individual needs.

A Swiss life insurance contract usually involves the four parties:

• The insurer (ie, the Swiss insurance company) issues the policy and provides coverage in return for the payment of either a lump sum or of regular payments, or a combination thereof.
• The policyholder enters into a contract with the insurer and receives coverage for him/herself and/or other persons (beneficiaries). A legal entity such as a company or foundation, but also a trust, can be the policyholder. This is confirmed in the insurance policy, which is a document issued by the insurer. As the contracting partner, the policyholder owes the insurance premiums that need to be paid to the insurer in return for providing insurance coverage.
• The insured person is the one whose life the insurance covers.This can, but need not be, the same person as the policyholder, but it must be a natural person.
• The beneficiary or beneficiaries are those persons who are designated by the policyholder to receive the specified capital from the insurer at either a specified date in the future or in case of the insured person's death, depending on the type of insurance contract.Also, the beneficiary can be a legal entity or a trust and must not necessarily be a natural person.

Life insurance is often arranged through an insurance broker who advises the insured person and policyholder and liaises between the contractual parties. Brokers are remunerated with commission paid by the insurance company. In most countries, insurance brokers must be licensed to carry on business: in Switzerland this will be the case by 2006.

The person insured under a Swiss life insurance contract must be a natural person. However, legal entities (companies, foundations, etc) may be beneficiaries and policyholders.

Many lawyers and estate planning practitioners have reservations with regard to designating a spouse and/or children as beneficiaries of a Swiss annuity if this is large and/or purchased by large estates. It is argued that, while the asset protection aspect of the annuity may be attractive, the estate planning limitations can be a hindrance.

However, as mentioned already, a trust or a legal entity such as a foundation may also be named as an irrevocable beneficiary of a Swiss annuity on the insured person's death. Accordingly, the concerns may be alleviated by naming the individual's estate planning trust or family foundation as the beneficiary.

One of the important advantages of Swiss annuities and life insurance is the strong protection it offers to assets placed into any insurance contract of this kind.

A non-Swiss resident (hereafter referred to as the "policyholder") may purchase a life insurance policy from a Swiss insurance company and designate his/her spouse and/or descendants as beneficiaries of the policy, or irrevocably designate any other third party (for instance, a legal entity such as a trust) as a beneficiary.

Swiss law then protects the insurance policy against any debt-collection procedures initiated by the policyholder's creditors and excludes it from any Swiss bankruptcy procedures.

Even if a foreign judgment or court order expressly decrees the seizure of the policy or its inclusion in the estate in bankruptcy, the policy may not be seized in Switzerland or included in the estate of the bankrupt party.

Unlike the designation of another third party as a beneficiary, in the case where a spouse and/or descendants are so designated, it is irrelevant whether the designation is irrevocable or revocable. The insurance policy will continue to be protected from the policyholder's creditors even if the designation of the spouse and/or descendants is revocable.

Creditors may seize the policy or have it included in the estate of the bankrupt party only if its purchase or the designation of the beneficiaries is regarded as a fraudulent conveyance under Swiss law. This is the case if the policyholder has designated the beneficiaries less than one year before the initiation of debt-collection proceedings ultimately leading to a bankruptcy decree against the policyholder or to the seizure of the latter's assets.

The same applies if the beneficiary has been designated with the clear intent to damage creditors or to give some creditors preferential treatment and the designation was made within five years of the date of debt-collection proceedings resulting in a bankruptcy decree or the seizure of the policyholder's assets.

However, the creditors then have to prove not only the policyholder's intent but also that the beneficiary was aware of the intent to defraud. Such intent obviously cannot be proved when the beneficiaries were designated at the time the policyholder was solvent and no creditors had yet asserted any claims against the latter that could have rendered him or her insolvent.

If the policyholder has designated his/her spouse and/or descendants as beneficiaries, the insurance policy will be protected from creditor claims irrespective of whether the designation is revocable or irrevocable. The policyholder may therefore designate his/her spouse and/or descendants as beneficiaries on a revocable basis and later revoke this designation before the policy expires if there are no threats from any creditors at that time.

When the insurance policy expires, the policyholder will usually be able to collect the proceeds accruing from the policy, extend the existing policy or roll the proceeds over into a new policy. If a creditor appears or the holder becomes insolvent at the time of expiration, this protection would cover an extended policy but not a new one.

In most cases Swiss annuities or life insurance contracts offer some tax planning benefits, and in some cases can offer significant relief from income tax and from inheritance tax.

Naturally, in order to benefit from any tax advantages, a life insurance policy must comply with the tax regulations in the policyholder's country of residence (ie, where he or she has his/her main tax residence). For example, a certain minimum duration may be required or the insurance must include a certain amount of life cover besides the investment component.

Income and capital gains on assets placed in a life insurance policy are generally tax-free in the hands of the life insurance company. No tax is deducted from the policy proceeds ie, the proceeds are paid net to the policyholder (or beneficiary, as the case may be). The assets paid into a life insurance policy do not constitute a gift as they are generally treated as a premium payment.

Furthermore, these assets do not generally form part of the policyholder's estate for inheritance or wealth tax purposes, since the nature of the client/policyholder's interest in the assets is not that of an owner but rather of the holder of an insurance policy. Finally, capital accumulated in life insurance policies is not taxed in several countries when the policy expires, or then only at a very low rate.

Under Swiss law, both variable and fixed annuities are treated as life insurance policies and are consequently exempt from Swiss income and asset taxes.

Swiss life insurance and annuities are also exempt from the 35% federal withholding tax.

Unlike many other foreign annuities (for example those issued in Liechtenstein or other low-tax jurisdictions), Swiss annuities are exempt from the one per cent US excise tax on the purchase of foreign annuity and insurance premiums.

This exemption derives from the adoption of a new Swiss-US Double Tax Treaty in 1998 and applies to premiums paid by a US citizen to an insurance company domiciled in Switzerland.

As a rule, foreign fixed annuities no longer enjoy taxdeferred status in the United States. US tax rules regard a Swiss fixed annuity as a debt instrument ie, a "promise to pay a certain sum" in addition to being an insurance contract.

The owner of a Swiss fixed annuity (as well as other foreign annuities regarded as debt instruments) consequently pays tax on the accrued income, including currency gains if the annuity is denominated in a foreign currency.

In the view of most tax experts, the loss of tax deferral means that distributions prior to the age of 59.5%, including loans against the policy, are not liable to the 10% penalty for early withdrawals. So tax-free withdrawals may be taken from a Swiss fixed annuity whenever the policyholder chooses.

On the other hand, income from foreign variable annuities may be tax-deferred. The tax-deferred status of Swiss variable annuities has consequences for early withdrawal in the same way as US contracts. However, the former offer a combination of asset protection, a choice of asset allocation strategies based on an investor's risk profile and other needs, as well as tax deferral for US investors. They consequently represent ideal long-term investments that use the power of compound growth for a retirement portfolio.

Swiss insurance companies do not report to any government - Swiss or foreign - if the policyholder is not resident in Switzerland. Thus neither the initial purchase of the policy, nor individual payments, nor interest or dividends earned, nor any other information will be reported and all transactions are kept strictly confidential and private between the policyholder and the insurance company.

In addition, insurance contracts are not subject to reporting in many other countries apart from Switzerland as they are generally viewed as an (insurance) contract rather than a reportable investment.

Swiss annuities offer instant liquidity. All capital, plus all accumulated interest and dividends, is freely accessible. Depending on the type of annuity, a minimal penalty in case of withdrawal applies only to an initial period of usually up to one year. So if funds are needed quickly, they are available and not tied down for a fixed period of time. Furthermore, all Swiss banks will accept Swiss life insurance policies as collateral for loans.

Swiss annuities are generally arranged on a no-load basis, so there are no additional charges or costs and the investment can be cancelled at any time without loss of principal or accumulated interest and dividends.

Swiss insurance policies would escape any forced repatriation under any exchange controls that may be imposed in future, because they are regarded as a pending contract between the investor and the insurance company.

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Marco Gantenbein and his team ensure that Swiss Insurance Partners provide at all times intelligent solutions that are sound, reliable and tailored to your individual requirements. Through their expertise and experience the firm is able to provide you with the information and advice you need to make Your Choice for Life.