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IS PRIVATE PLACEMENT LIFE INSURANCE THE PERFECT PRODUCT FOR GLOBAL HNW FAMILIES

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By Louis Zuckerbraun, Managing Director, GMG Insurance 

 

Everyone wants to know that their family will be okay after they die and will do whatever they can to ensure that. That’s as true for high net-worth individuals (HNWIs) as it is for anyone else. But in an age where families are spread across the globe, leaving the kind of legacy you want can be incredibly complicated.

One product that could make things a great deal more simple is Private Placement Life Insurance (PPLI).

Originally conceived in the US, PPLI is rapidly gaining traction across Europe. Not only is it more efficient than traditional forms of life insurance, allowing the investments within the policy to hold many more types of assets and asset classes, it can also be a useful way to overcome specific issues such as management and control, beneficial ownership and substance.

 

PPLI explained 

While PPLI is gaining popularity across the globe, it’s still a relatively unknown product set, even among the HNWIs it would most benefit. It’s therefore worth looking at exactly what PPLI is.

Effectively an investment wrapped inside an insurance policy, a PPLI policy’s cash value depends on the performance of the investments within it. These investments can include hedge funds, mutual funds, and other potentially lucrative assets. Ultimately, it’s down to the policyholder to choose what kinds of investment they’d most like to have, meaning that they have a lot more freedom than they would with an ordinary life insurance policy.

Depending on the jurisdiction, a PPLI policy can also provide significant tax savings. In the US, for instance, the Internal Revenue Code treats insurance differently than it does investments. So, by packing an otherwise taxable investment in a tax- free policy, investors can reap big rewards on the investment, as well as the death benefit, tax-free.

 

Louis Zuckerbraun

Going global 

But PPLI policies aren’t just beneficial from a tax perspective, they’re also useful for anyone with a global family.

A PPLI policy is generally by nature a globally focused vehicle. So, for instance, approved banking partners and advisors in Switzerland can work with US persons, to provide an investment vehicle that has a global focus.

The policy would purchase global funds and be managed by a global advisor who is outside the US but understands the US market. This makes it perfect for anyone who wants to diversify from traditional United States Dollar denominated investments but wants to maintain tax compliance and work with international advisors.

This solution works very well with a global family who may have, as an example, a child studying in London, or with international businesses, and who wish to build exposure globally in a tax efficient and US compliant manner.  An international PPLI policy would be very beneficial to the family.

Further, the policy can be denominated in Swiss Francs, US Dollars or Euros depending on the needs and strategies of the policy owners or beneficiaries and still pay tax efficiently to the US persons.

These features also mean that a PPLI policy can be a useful replacement for, or supplement to,  a family trust, especially if a tax authority is unlikely to accept the trustees as the legal owner of the assets held in the trust.

 

A clear choice 

With more and more families living in different geographies, a PPLI policy is therefore an option that should be playing a much bigger role in the mainstream. It provides an accepted and compliant solution to the planning challenges faced by ultra-high net worth and high net worth families.

While life insurance, in general, provides a mechanism for estate tax planning, asset protection and investment flexibility that cannot be beaten by any other compliant tool,  PPLI provides the flexibility and protection that informed high net worth families increasingly require.

If you’re looking a purchasing a PPLI policy, however, it must be managed by professional insurance and legal advisors who understand the product.

 

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What happens to your investments after your death?

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By Jaco Prinsloo, certified financial planner at Alexforbes

Financial planning regarding the succession of investments is rarely carried out, at least in South Africa. As a result, potential heirs are often not sure what to do or where to start to claim and settle a loved ones investments. In many cases, the family is unaware of the existence of an investment portfolio. With succession planning, the transfer of assets (whether property, your bank accounts, cars or investments) is facilitated.

Today I want to focus on investment and the succession planning of investments, specifically discretionary investments, compulsory investments and policies. The type of investment will determine how the assets and proceeds get distributed, so we first need to look at the different investment types:

Discretionary investments

Discretionary investments are any investment you make with after tax money at your own discretion. Discretionary investments include:

  • Unit trusts
  • Money market accounts
  • Fixed deposits
  • South African retail bonds
  • Share portfolios
  • Tax free savings accounts

Jaco Prinsloo

These investments will form part of your estate and will be subject to estate duty and executor’s fees. However allthou a tax-free savings account forms part of your estate there are no executor’s fees payable. The proceeds from the investments will be distributed as per your Will to your nominated beneficiaries after your estate has been settled. Because these investments form part of your estate the investments will be “frozen” and no transaction or changes can be made to the investments until the proceeds are paid to the estate.

Investment and Life Policies

Life insurance is a type of insurance contract where you agree to pay premiums to keep your life cover active. If you pass away, the life insurance company will pay the life cover benefit directly to your nominated beneficiaries, which can be a person or your estate.

You also get investment policies like living annuities and endowment policies where the investment value pays to the nominated beneficiaries on your passing. One benefit of investment and life policies is that it does not form part of your estate, which means no estate duty and the proceeds get paid directly to your nominated beneficiaries giving them access to cash while they wait for the estate to be wind up. Making it an essential part of anyone’s overall financial plan.

Compulsory investments

Compulsory investments are investments which are compulsory with some employers. Working for some companies you might be required to be part of a provident or pension fund as part of your employment contract. Compulsory investments might also offer some tax benefits but investors have limited access to their money and these investments are governed by Regulation 28 stipulating where and how you can invest. Compulsory investments can be summarised as “retirement funds” and include:

  • Pension fund
  • Provident fund
  • Retirement annuity fund
  • Preservation funds

The proceeds from retirement funds are distributed as per Section 37C of the Pension Fund Act.

Which means the trustees of the fund will use their discretion to distribute the proceeds of your retirement savings to insure all dependents and beneficiaries receive equal and fair benefits. Belonging to a retirement fund you will be required to nominate beneficiaries but its important to remember the beneficiary nomination is seen as a guide to the trustees or a “wish list” and the ultimate decision on how the benefits get distributed lies with the trustees of the fund.

As shown above, it is important to keep your Will and nominated beneficiaries updated on your policies and retirement funds. So how to plan for succession?

The first step is to talk to your family members about your investments and the administrator of these investments. Secondly you can create an organised folder with all the documentation of your investments, policies, copy of your Will and personal documents like your ID copy and bank statements. Your family does not need to know the value of the investments but the knowledge of the investments and where to find all your important documents will make it easier for them to start the claim process. Speak to a certified financial planner for advice on your beneficiary nominations and to formalise your wishes in a document, thus setting up a will.

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Finance

YOUR PARTNER SHOULDN’T BE YOUR RETIREMENT PLAN

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By Buhle Langa, certified financial planner at Alexforbes

Financial independence is important during any person’s lifetime, at all stages.

By starting to plan for your retirement early in your working life, you can maintain your standard of living in your retirement years. While a life partner can be wonderful, they should not be considered as a part of your retirement plan as they may not even have saved sufficiently to meet their own requirements.

Women tend to live longer than men, and since research shows they generally earn less, this means that they need to save more, for longer, than their male counterparts.

It is important to familiarise yourself with how you were married and what the terms are should the marriage end either in divorce or death. If you are married in community of property, both you and your spouse’s assets will form part of your deceased estate and your spouse will automatically, by law, be entitled to 50% of the combined assets.

You can be married out of community of property with or without the accrual system. Being married without accrual is the easiest system to work with in your will and estate; your assets remain your own and you may deal with your assets as you wish with no claim from your surviving spouse.

Buhle Langa

Often, a home will be registered in one partner’s name while the other contributes to the bond repayments. If you are not married or are married out of community of property, ensure that you have a written cohabitation agreement. These financial contributions can be difficult to prove if the relationship ends, leaving the one partner with no claim to the property.

Having sufficient planning in place for both parties is always advisable, and each party should have their own savings and investments. A tax-free savings account is a great place to start, allowing you to save up to R36 000 a year without paying tax on the growth.

Increasing your contributions to your work retirement fund will help you accumulate larger savings for your retirement. To take advantage of the benefits of compound interest and avoid a hefty tax liability, it is also advised to keep your retirement savings invested when changing jobs. When leaving your employer, a number of tax-free options are available to you and one should seek financial advice in order to understand which of these is the best choice for you:

  • Transferring your savings to your new employer fund
  • Transferring your savings into a retirement annuity fund
  • Transferring your savings into a preservation fund
  • Keeping your funds invested within your previous employers retirement fund through a paid up status (not contributing further to the fund).

Each of the options noted have varying implications such as when you would be able to access the retirement funds either through resignation, dismissal or retirement and whether you are able to continue contributing towards the fund, therefore each individual person would need to seek financial advice from an accredited financial advisor so as to determine which option would best suit their individual needs.

Regular consultations with a certified financial planner will ensure that you are on track for a secure retirement.

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