A single-premium life insurance policy is commonly referred to by many names. Historically, these policies were whole-of-life contracts designed primarily to provide an inheritance or charitable donation upon the policyholder’s death. The death benefit typically amounted to 125% of the initial investment. These were traditional with-profits policies, allowing policyholders to share in the insurer’s profits.
The concept originated in the United Kingdom with the UK Life Assurance Act of 1774, which introduced the requirement for insurable interest. By the 1970s and 1980s, the range of investment options had expanded, though it was still limited compared to modern standards. Over time, the insurance component of these policies was reduced to 101% of the invested sum, and medical underwriting was no longer required.
The introduction of open architecture and trading platforms has recently enabled the creation of bespoke investment portfolios within these policies, marking a significant evolution in their structure and flexibility.
The policies are typically offered by offshore bond insurance companies based in jurisdictions that do not impose tax on investment funds, such as Ireland, the Channel Islands, and the Isle of Man. These jurisdictions are well-established with the UK HMRC and maintain the reporting channels necessary to ensure tax efficiency.
Income generated within the underlying funds, including interest, dividends, and rental income, is tax-free, although foreign income may be subject to withholding tax in the country of origin.
Over the years, the cost of these policies has decreased significantly, with fees now ranging from 0.10% to 0.25% per annum, depending on the premium level or account value. Additional charges may include dealing or trading fees (typically £20–£50) and quarterly administration fees (£100–£250). Offshore bonds can be structured without lock-in fees or exit penalties, and there is no mandatory holding term. If such conditions exist, it usually indicates commission-based sales.
Tailored Wealth Solutions
For high-net-worth individuals and families with cross-border needs, insurance-based solutions play a pivotal role in structuring and preserving wealth.
Offshore bonds are life insurance policies whose value depends on the performance of an underlying portfolio, often managed within an open-architecture framework.
- Tax Efficiency: Assets grow within the policy free from ongoing income or capital gains tax.
- Confidential Wealth Transfer: Offshore bonds allow seamless asset transfers via trusts or beneficiary nominations, bypassing probate, forced heirship issues, and family disputes.
- Customizable Portfolios: These policies can hold a wide range of assets, providing unparalleled flexibility for diverse investment objectives.
- Administrative Simplicity: Only the policy’s value is reported under global regulatory frameworks like the Common Reporting Standard (CRS), maintaining confidentiality of individual holdings.
- Diverse Investment Options: A wide array of tradable assets can be included, offering broad diversification.
- Tax Control: Investors decide when to realize gains, potentially deferring tax until relocating to a lower-tax jurisdiction.
Tax Efficiency of International Life Plans when you Return to Australia
International life plans taken out while you are an expatriate can maintain their tax efficiency on your return to Australia. Policyholder taxation after returning from overseas.
Life Insurance and Critical Illness Policies
- Lump sum benefits are not taxable on receipt.
Regular Premium and Single Premium Unit-Linked Savings Policies
- Enjoy the benefits of gross investment returns within your policy.
- Switch funds inside your policy without paying CGT.
- Chargeable gains known as bonuses are assessable income and taxable at your marginal rate.
- Only bonuses received within the ten-year eligibility period are assessable income.
- Premium increments of more than 25% of the previous year’s premium amount extend the eligibility period.
Insurance-based savings plans can bring you a number of tax-planning benefits if you decide to return to Australia.
However, as legislation and ATO interpretation are subject to change, it is essential that you consult with your adviser before proceeding. In addition, while we would not expect there to be Australian GST implications, you should take advice, as this will depend on your individual circumstances.
Capital Accumulation – Gross Roll Up
International life insurance products are generally not subject to tax while the investments accumulate in value. This means your savings can grow tax-free, except for certain withholding taxes.
Managing Your Investments – Switching Funds
As your investments grow, you may wish to switch funds to realise gains and invest in new opportunities. Buying and selling funds directly can create a liability to CGT, but by using life assurance products, you should be able to avoid this and make decisions driven by investment performance rather than tax considerations.
Withdrawing Money to Support You in the Future
There may come a time when you want to start using your investment to supplement other sources of income such as your pension, or for capital expenditure such as buying a property. You will be able to set up a regular ’income’ withdrawal or take ad hoc payments or fully surrender the plan, if it is no longer required.
As an Australian tax resident, you will be assessed for income tax on the chargeable gains arising from life assurance policies in accordance with the income tax legislation. These gains are known as bonuses and only become taxable when you actually receive them and not while they are accumulating in the policy.
If you hold your policy for more than ten complete policy years since its commencement, you will not be taxed on the bonus because, after this time, it is no longer included as part of your assessable income.
If a bonus payment occurs within the first 8 years, it will be fully assessable for income tax, but in years 9 and 10, only two-thirds and one-third of the bonus, respectively, are assessable.
You should be aware that it is not possible to add significantly large sums to an existing investment and still avoid a possible tax charge after ten years. Rules exist that are designed to restart the ten-year period from the start of the policy year in which the new investment is made.
In the event the policy terminates upon your death, the payment is not assessable income to the taxpayer upon receipt. Also, the estate of the deceased will not be subject to CGT on the proceeds as they will be received for no consideration, resulting in any gain or loss being disregarded.
Succession Planning to Avoid Payment Delays on Your Death
As an expatriate, you may have acquired assets in different countries with different laws on how they will be taxed and passed on, if you die.
An international life company may require sight of a Grant of Representation before paying any monies on your death to your personal representatives. Before this Grant can be applied for, your representatives will first have to obtain the equivalent legal documentation in your home country. This entire process can be lengthy, resulting in considerable delays before investments can be passed on to those who need them.
You can avoid such delays by planning ahead and using beneficiary nominations and trusts, where appropriate, to ensure the smooth transfer of wealth to your beneficiaries.
DISCLOSURES
Private Placement Life Insurance and Annuities are unregistered products and not subject to the same regulatory requirements as registered products. As such, Private Placement Life Insurance and Annuities can only be offered to accredited investors or qualified purchasers as described by the Securities Act of 1933.
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
