Expat Investments: What are ‘Insurance Wrappers’ ?

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Soon after you started researching financial planning, you probably encountered the phrase ‘insurance wrapper’. The basic concept is that mutual funds and other tradable financial instruments can be ‘wrapped’ in an insurance policy to give it additional tax and estate planning benefits. Theses are insurance products in name only – the actual insurance coverage is only about 1% of the value of the portfolio, and investors don’t have to pay separate insurance premiums. 100% of contributed capital passes right through to the investment funds. The result is a flexible, tax-efficient structure for investing in the same types of funds that most households are already using.

Why are these instruments so popular now?
Insurance wrappers allow private investor to put their investment asset portfolio in a tax efficient structure. Earned income is tax-free as long as the assets remain within the wrapper. Policy holders can make their own investment choices or direct a professional fund manager to take charge. This approach is also appropriate for estate planning because the investor can designate a beneficiary who will receive the life insurance proceeds (i.e.: investment funds) tax free.

How does it work?
Unless you have millions to invest in a private placement, your best bet is to use an off-the-shelf savings or investment plan offered by large, stable insurance companies. Big international houses like Generali, Aviva, and Friends Provident should meet most household investor’s needs. They are stable, regulated and usually domiciled in tax havens such as Isle of Man, Guernsey or Hong Kong.

Your advisor will help your figure out how much to invest. Investment plans usually come in the form of regularly scheduled cash injections or a single lump-sum payment. Some plans are more flexible than others when it comes to changing your schedule or adding lump sum payments, so makes sure you understand your options.

Once you have made the necessary decisions, you take ownership of an insurance policy while the insurance company retains ownership of the investment assets. A contract secures your ownership and stipulates your rights, responsibilities and names a beneficiary.

What about the premiums and fees?
The assets being placed within the wrapper count as the premium paid. You will pay fees and charges for the set-up and management of the insurance wrapper, but not in the form of premiums. Fees vary with the company and product, but most use a variable system of charges may include an ICP, or Initial Contribution Period, management fee, or other charges and fees. Ask your financial consultant about the ‘all-in fee’ for a specific term to compare different contracts.

What are the benefits?
There are 5 important benefits to using insurance vehicles as long term savings plans. Security. These companies are old, secure and highly regulated. In most cases the funds are protected and guaranteed by government agencies, but you must check carefully since contracts vary.

Tax.
This type of savings plan is highly efficient. That means no unnecessary taxes. Investors are not taxed on growth of investments held in the wrapper but you are still governed by applicable tax authorities. Once funds are removed from the insurance wrapper your tax situation will depend on your specific situation and the governing laws of the jurisdiction in which you operate. (In most cases law abiding Americans are going to find that they are not getting as much of a benefit as their European and Asian counterparts.) Everyone’s situation is unique, and you should make sure that you discuss this issue carefully with both your financial advisor and tax specialist.

Flexibility.
Insurance wrappers are consumer products, and have many convenient features built in to the basic contract. You should investigate what competing contracts offer as far as access to investment funds before the end of the plan term, suspension or changes to premiums, and free switching between mutual funds. Companies offering insurance wrappers work hard to maintain a wide range of in-house or authorized funds that gives most investors an adequate choice. All wrappers should allow you to assign beneficiaries, giving the plan a strong estate planning function as well.

Professional management.
Regular savings plans are built and managed by financial professionals and fund managers. Most plans offer professional portfolio management for free or at low fees. Furthermore, wrappers integrate very well with the rest of your financial and estate plans.

Cost.
Figuring out the final cost of these programs isn’t easy but if you are investing for over 15 years you’ll probably find that your all-in costs are under 2% of total funds under management. You will have trouble finding a cheaper option for a comparable level of management and service.