Money Machine

The Money Machine Part IV: Insurance and Tax-optimized Investment Bonds

2/1/2021 8:00:00 AM
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One of the best pieces of advice you can give to a young person with some spare money every month (even as little as $100) is to buy life insurance. This is especially true due to COVID-19 and the pressure this has caused with banks and excessive spending by central banks in most Western countries. Add to that the historically low interest rates, and you’ll see why it makes no practical sense to keep your money in a bank account.

Life insurance usually comes with excellent interest rates, especially if we’re talking about indexed life insurance. Having part of your money in a life insurance policy makes sense, especially today.

High-wealth clients and family offices’ highly sophisticated strategy is to use a Life Insurance Company investment bond policy held by an insurance provider in a jurisdiction like the Bahamas or Bermuda. This ‘bond’ acts as “wrapper” for a very wide range of different investment funds and investment instruments.

Life insurance provides amazing benefits in terms of asset protection and tax deferral as follows:

  • Assets placed in a life insurance policy are tax-deferred, which means that the beneficiary does not pay tax on the assets’ growth while they are in the policy. If the policy is held in an optimized jurisdiction, the tax deferral is maximized, which means that most governments treat them as tax neutral. Thus, everything that grows inside the policy is not taxed. No one can beat the compounding effect of such a policy. No wealth tax, no capital gains tax, no inheritance tax when the policy is used in conjunction with a Trust, no income tax, nada.
  • A Life insurance policy of this nature means that everything inside the policy cannot be attacked whereby a trust holds the life insurance. In such a case, it is the Fort Knox of asset protection. This is the best asset protection possible.
  • Generally, the capital placed inside the bond and the growth of that capital is not subject to CRS reporting requirements because insurance falls outside the CRS regime.

What is an international bond?

Bonds are collective investments in which many individual investors’ investments are pooled. This pooling enables relatively small investors to benefit from the economies of scale made available to institutional fund managers. They are technically single premium life assurance contracts and normally have nominal life cover attaching. A wide choice of funds is available, ranging from managed to specialist funds.

These funds are variously described as Money Market funds, Protected funds, Managed funds, Blue Chip funds, exchange traded funds, ESG ( Environmental, Social, and Corporate Governance ), Adventurous funds, Ethical funds, Indexed funds, specialist funds, et cetera. Direct share holdings can also be held, both listed and unlisted.

A bond fund’s income and gains will generally be free of tax in the relevant jurisdiction if held in an appropriate location. Hence they are often referred to as benefiting from “gross roll- up.” Even when a conservative and relatively low risk approach is taken as to the funds selected for holding within the Bond the investor’s money can double in just ten years.

While there will typically be no tax in the particular tax haven that the insurer is based on, the fund may have some very minor withholding tax on any dividend income generated from underlying investments.

The ability to defer tax is greater under an international bond than an onshore bond; therefore, the longer it is held, the greater the tax deferment’s compounding effect. Thus, keeping your assets in an optimized jurisdiction will create a much greater return as compared to an onshore bond over the longer term.

To be eligible to invest in an investment bond, an individual investor must be 18 years of age or over. The investment can also be made on a joint basis or by a company or trustee(s). The nominated life (lives) assured is usually the applicant/ investor/trustee.

The Exclusive Investment Bond

This “Exclusive Investment Bond” is one of the best examples available of an “international” bond.

It is a flexible investment. It can be set up with regular withdrawals if necessary. Plus, it can offer you the possibility to access tax planning benefits, even reducing tax liabilities on the death of the assured. The policy can assure up to six lives to ensure the bond’s continuity and end when the last assured person dies. The company will pay a death benefit of 101% of the bond value after the notification of the death of the last life assured.

One of the Bond’s best features is that you can spread and vary your investment across dozens of possibilities of funds and assets depending on your financial goals and the risk exposure you wish. Thus, you can have a tailor-made portfolio instead of a cookie-cutter solution, which many banks offer and promote.

Therefore, with this open architecture, you can build an investment with different geographical focuses and within specific investment sectors.

The minimum lump sum is $30,000 and no maximum as such. But enormous amounts will call for the evidencing of the “Source of Wealth,” namely for sums over $600,000.

A wide choice of managed, general, and specialist funds are available, offering investment opportunities in equity, property, and fixed-interest securities. Bonds enjoy the facility to switch funds, usually at no cost. Although classed as single premium investments, ‘top-up’ facilities are offered, allowing further amounts to be invested either regularly or ad-hoc.

Structured products can be placed within the Exclusive Investment Bond. It is the name given to a group of investments designed to deliver a known return for given investment circumstances and combine two or more underlying assets to offer growth or income potential while usually offering some degree of capital protection.

Such investments normally share the following characteristics:

  • Fixed terms, meaning they are not as liquid as deposit accounts or equity investments. All the return or the interest alone is linked to stock market indices’ performance.
  • Enhanced returns available because of the additional risk is taken.
  • Growth or income options, or both, are available.
  • It can be held within a Life bond.
  • Varying degrees of capital protection may be available and offered only for a limited period and a limited amount of funds.

A structured product can take two forms – a structured deposit and a structured investment. Structured deposits and structured investment products with some capital protection are often purchased by those looking for alternatives to saving accounts and other deposit-based products.

These products offer growth linked to stock market performance – usually via an Index, such as the S&P 500 & the FTSE 100 Index, although the return amount is sometimes capped.

Some structured products expose your capital to risk. However, these plans are often set up with a “safety net feature,” which means the stock market can fall by a certain percentage without affecting your capital return.

Investing in structured products is a suitable strategy for medium to longer-term investors. There are no specific investment level limits other than those that may apply to the investment wrapper.

    Why the Exclusive Investment Bond?

  • Funds purchased from the source generally have high entrance fees and an annual fee. The EIB avoids this issue as it has an annual management fee of 1.18%, which is reduced to 0.3% per year after ten years.
  • Acces to a complete range of funds with a global reach, including hedge funds and other specialist funds.
  • Backed by a large multinational custodian bank. This means that the assets are entirely protected in a tax-efficient, low-cost jurisdiction with a steady banking system.
  • The speed of service is fast, with no need to send physical documents. Setting up the plan, adding money, and withdrawing is straightforward and simple.
  • Minimum investment is USD 30,000, GBP 20,000, or EUR 25,000, which is significantly lower than most companies.
  • You can hold a myriad of assets on the platform: individual stocks, funds, professional investor assets, currencies, and even several cryptocurrencies.
  • The provider is associated with brokerage experts, which helps investors access Custodian Trader and increase their investment opportunities.
  • They have a segregated account system. This means a client’s assets are held aside from the company’s liabilities. Thus, in the unlikely case of bankruptcy, a client’s assets won’t be used to pay for debts and other liabilities.
  • It is a portable, highly tax-efficient structure.
  • You have 24/ access to valuations.

    What else should I know?

  • The minimum premium is USD 30,000.
  • The minimum investment is USD 3,000.
  • It should be considered a medium to long-term investment (at least five years).
  • You must have at least 3% of your policy value in the cash account.
  • You must report any changes to your address, country of residence, citizenship, or domicile.
  • You can pay additional premiums whenever you want.
  • Investment transfers can be deposited directly into a policy with a power of attorney.
  • There's the possibility to appoint a discretionary manager to your policy. They will charge their own fees to do so.

What about American clients?

Many wealth managers run away from American clients due to the constraints put in place by the IRS and by FACTA.

However, in this case, there are some adaptions to comply with American regulations.

The US financial system is not as stable as it once was, and with the never-ending spending cycle after COVID-19, it will soon face many problems. Plus, interest rates are meager.

It doesn’t make much sense to keep all your money in the US or put it in one basket. You can carefully plan a US-based wealth management strategy and quickly see it go out of the window if the financial system collapses as it did in 2008.

However, an international investment bond can take your wealth management strategy to the next level.

And if you’re moving your money abroad, it makes sense to put it in a 1) safe, 2) legal (nobody wants problems with the IRS), and 3) optimized place. This means you want to keep it in an economically stable country where your money won’t have any issues, somewhere where the IRS won’t be suspicious of you, and somewhere where you will pay less taxes and can obtain significant yield.

So, it’s all about you protecting your ‘nest egg’ as best as possible against any threats, whether it is prohibitive taxes, creditors, ex-spouses, former business partners, and, of course, the government.

All in all, this strategy’s design must be done carefully. The IRS basically can, essentially, sidestep the legal definition and define what they see as a life insurance policy. To avoid this issue, all American clients need a structuring that uses a trust structure with a settlor’s details kept entirely confidential.

But that doesn’t mean American clients can use whichever trust they desire. If you use a Nevis trust, the IRS may cause some problems.

In this regard, a Maltese trust arrangement can help you avoid IRS-reporting issues. It is the only international trust arrangement the IRS has categorically approved, meaning it won’t cause reporting issues and there won’t be any investment curtailments. This arrangement is suitable for American tax residents and US expats.


Why is this a good offer?

This is a flexible approach to product development to produce instruments with international investment in mind. The objective is not to produce cookie-cutter solutions but investments that produce a long-term performance that suits widely different investment needs and profiles. It's a tailored solution for you, whether you want a sophisticated investment portfolio, a high- risk, high-reward strategy, or just saving for the future with tax-optimization. 

Disclaimer: The information contained in this article is for informational purposes only and does not constitute financial advice or recommendations. Investing in financial products or cryptocurrencies involves risks, and you should be aware of the potential risks involved before investing. The content on this website is not intended to be a solicitation or offer to buy or sell any financial products or services. The information provided does not take into account your specific investment objectives, financial situation, or needs, and should not be relied upon as a substitute for professional financial advice. You should seek independent advice from a financial advisor or other professionals before making any investment decisions. Please be aware that the legal status of cryptocurrencies and other financial products may vary in different jurisdictions and may be subject to regulation. It is your responsibility to ensure compliance with any relevant laws and regulations governing the sale and marketing of financial products and services in your jurisdiction.

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