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Swiss annuities as secure trust investments

A life insurance contract generally involves four different parties:

• The insurer (the insurance company)

• The policyholder

• The insured person

• The beneficiary or beneficiaries


The insurer (i.e. the insurance company) issues the policy and provides coverage in return for payment of either a lump sum or regular payments, or a combination thereof.

The policyholder enters into a contract with the insurer and receives coverage for beneficiaries, of which the policyholder can be one. This is confirmed in the insurance policy, 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. Legal entities (companies, foundations, etc) as well as trusts may be policyholders.

The insured person is the one whose life the insurance covers. This can but need not be the same person as the policyholder.

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. Both legal entities and trusts may be beneficiaries.


3. Investment characteristics and returns

Swiss annuities are a type of investment vehicle rather than an investment category, although in view of the special asset protection features and depending on the insurance elements that are included, can also be looked at as an investment category in their own right.

The word annuity literally means “annual payments” and when an annuity is bought, the insurance company promises to pay an income for a specified period of time. Accordingly, the key questions that must be answered when you invest in an annuity are a) what does the insurance company promise and b) will insurance company be able to keep the promise. The answer to the first question is of course different from insurance company to insurance company, so it pays to compare different offers and quotes. The second question relates primarily to fixed annuities and is less clear as it has two sides: on the one hand, in a fixed annuity the insurance company guarantees a certain return on investment, and – in Switzerland – is legally obliged to keep this promise. This then fundamentally depends on the financial strength of the insurance company and the stability and security of the jurisdiction in which the insurer operates. Switzerland is arguably the safest and most stable jurisdiction in the world. But equally important, Swiss life insurance companies are required to maintain a security fund which covers all their obligations plus an additional security margin. This fund is segregated from the company’s operating assets. Therefore, even if a Swiss insurer were ever to go bankrupt (none ever has since the existence of the Swiss insurance industry!), investments of policyholders are still safe. The other side of the answer relates not to the guaranteed minimum return, but to the surplus participations, which are not guaranteed but which the insurance company expects to pay out. Whether or not an insurer is able to meet these projected surplus participations depends on such factors as interest rate developments, general investment market returns, and how well the insurance company manages the assets that it takes care of. Here it is important to review how a particular insurer has managed to keep expectations in the past, and here the difference between the different insurers are considerable.

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 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 give loans and accept Swiss life insurance policies as collateral.

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

Example:

Let us assume the person to be insured is male, born July 1, 1955, and the effective date of the insurance shall be October 1, 2005, with a 10 year deferment period. The duration of the insurance shall be on the insured person’s life. With an initial investment of CHF 500,000:

*Participation on surpluses: this information is given as examples and are calculated on the basis of the present rates of participation; therefore, they cannot be guaranteed for the coming years.

As the table above shows, Swiss annuities represent ideal long-term investments that use the power of compound growth.

4. Asset protection

A significant advantage of Swiss annuities and life insurance is the strong protection of investments placed into any insurance contract of this kind.

A trustee may purchase for a trust a life insurance policy from a Swiss insurance company and designate natural persons – for example beneficiaries of a trust – or legal entities as beneficiaries of the policy. This can be done on a revocable or irrevocable basis. Swiss law then protects the insurance policy against any debt-collection procedures initiated by the policyholder’s (i.e. the trust’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.

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.

5. Tax advantages

Swiss annuities and life insurance are investment vehicles 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. For trusts that operate in a tax-neutral environment, Swiss annuities and life insurance are generally tax neutral as well.

Under Swiss law, both variable and fixed annuities are treated as private life insurance policies and are consequently exempt from Swiss income and asset taxes, unless the policyholder is a Swiss tax resident. Swiss life insurance and annuities are also exempt from the 35% federal withholding tax.

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

6. Conclusion

The Swiss insurance industry has an impeccable track record and offers highly sophisticated products and services that are attractive not only to Swiss clients but – perhaps even more so – to international investors and in particular for trustees seeking to invest trust assets and looking for very safe and stable investments. Additionally, asset protection may be a consideration, and all transactions can be done in a completely tax free environement. All of these advantages are available in the environment of legal and economic stability that Switzerland offers and that is second to none in the world. Accordingly, Swiss annuities and life insurance are truly unique.