In this article I will explore how advisers can utilise insurance, not just in terms of protecting against traditional risks of illness or death but also in terms of wealth management and estate planning, to improve the outcomes of both new and existing expatriate customers in the United Arab Emirates.
Have you ever heard the argument that savers and investors in the UAE don’t need life insurance and should simply buy investment or mutual funds instead?
Some observers have made the point that because there is zero personal tax in the UAE, investors should simply buy straight mutual funds, perhaps via a platform, because they don’t need the insurance wrapper.
Furthermore, with regulation proposed by the Insurance Authority to cap commissions on insurance products, which could bring their remuneration more in line with mutual funds, some commentators have even gone as far as to say that the days of investing in life insurance for savings and investment may be limited.
Wrapper impact
We at Friends Provident International don’t buy this. We are not saying that investment funds are inappropriate, the contrary in fact – life insurance companies often use mutual funds as the underlying vehicle to drive a customer’s investment performance – it’s just that the life insurance wrapper we place around funds, perhaps bought via a platform, can change a good idea into a great one.
Without the life insurance wrapper, customers could lose out on a number of important benefits and may not receive the best solution for their needs. Asset managers and fund platforms are still complementary vehicles to life insurance. They are not mutually exclusive.
The advantages of life insurance are very real and technical in nature so let’s explore this in more detail. Much of this is country specific but here are five material reasons for using life insurance with wealth management customers.
1. Tax
Life insurance products are generally incentivized by governments worldwide because they reduce the burden on the state that can be triggered by the death of a breadwinner. Life insurance products are often more tax advantaged than mutual funds in many countries and this can apply as much to savings and investment products offered by life insurance companies as much as pure protection products.
Maybe the customer doesn’t live in a high tax location today, but expatriates are mobile by nature and it is quite possible they will be resident in a high tax jurisdiction at the time of their death or at the time they draw benefits.
Encashing a life policy containing a portfolio of mutual funds will generate higher returns (after tax) than a straight portfolio of mutual fund in many countries because of this favourable treatment. You could argue that UAE residents should simply encash directly held mutual funds before they go to reside in a high tax country but this is a high risk strategy. Markets could be depressed and being forced to sell assets before they leave could crystallize an unnecessary loss. With life assurance you are freer to choose when to encash.
Switching between mutual funds within an insurance wrapper doesn’t usually incur a chargeable tax event either as any gains are normally rolled up within the policy until ultimate encashment. This is not generally the case with mutual funds where a switch to a different fund will usually trigger a tax charge in the customer’s country of residence, which could be significant and will impact long-term customer returns.
On death, life insurance is often exempt from inheritance taxes (sometimes it needs to be written under a trust) as it can be structured to fall outside of the estate, meaning that the heirs will inherit the full value of the assets. This is not generally the case with mutual funds, which normally form part of the estate on death.
Trusts, in combination with life insurance are particularly effective as a planning tool but on their own or in combination with straight mutual funds are not as effective. This is particularly due to the gross-roll up of benefits under an insurance policy.
2. Death benefits
Life insurance, by definition, carries an element of life cover. This is really important when saving for a particular goal like retirement or children’s education. It may not be sufficient for the customer to save in a mutual fund for their retirement or their child’s university education. What if they were to die soon after starting to save? They would not have built up a sizeable pot and on death, their loved ones would simply be paid the small sum accumulated to that point. Furthermore, it could be taxed. By saving in a life insurance policy the customer’s life will protected with a sum payable on death which could secure the retirement they were expecting to enjoy with their spouse or secure the education of their child, even if the worst were to happen.
