6 September 2018423

ULIP vs PPLI - a new way to protect capital. Differences, advantages and disadvantages.

The life insurance policy with an open architecture of investment opened through a foreign insurer has two different abbreviations: ULIP (Unit Linked Insurance Plan) and PPLI (Private Placement Life Insurance). Both have significant differences in the technique of execution, and therefore the real advantages and disadvantages for the investor. Before comparing these insurance programs note that ULIP and PPLI do not have much in common with the Russian counterparts of solutions such as investment life insurance and endowment life insurance. Russian life insurance programs designed to meet only the long-term conditional objectives of the investor. The condition is - survival, death for any reason or disease. Only in this case the investment life insurance and endowment life insurance disclose their full destiny and becomes the support for the beneficiaries specified in the policy. In any other situations, the investment life insurance and endowment life insurance do not meet the interests of investors, since the practice of withdrawal of Russian insurance policies is already common. The investment life insurance and endowment life insurance policies structure cannot be called as an “Open” investment architecture. There is no policy liquidity until the occurrence of the insured event. Proceeding from this, similarities with ULIP and PPLI, Russian analogs have only in the words "Life Insurance". On this, all ends. The investment life insurance and endowment life insurance are a safety cushion, the reserve of which must be calculated not more than 10% of the investor's annual savings and cannot be used as an instrument consolidating all of its assets, as it meets other objectives. Using the investment life insurance and endowment life insurance as an analog of the ULIP and PPLI, the investor risks "burying" his money for many years. There will be no possibility to withdraw them from the policy without a significant fine and tax consequences since it is not possible to foresee the exchange rate at the time of withdrawal. In addition, you must remember about exchange difference.

Returning to the ULIP and PPLI programs, it is worth noting that, unlike the investment life insurance and endowment life insurance, both instruments act as protective consolidators of the investor's assets and both have the same structure, but ULIP is a box-based solution for the mass segment, and PPLI is an individual solution for large investors in the HNWI and UHNWI segment. The reasons for this segmentation lie in their functionality and capabilities.

English method.

ULIP was the first tool created in the 50s in the UK for the mass segment. Specifically for those who want to invest wisely and maximize tax optimization. India and other former British colonies are only followers of this tool and are not the first owners of this idea. The mechanism of ULIP, for example, in the jurisdiction of the Channel Islands, is as follows. The investor opens an insurance policy and transfers money to the insurance company on account of this policy. 10% of these funds remain on the insurance policy account, and 90% of the investor's funds are transferred to the trust. In this case, the trust is a mutual fund. At the same time, this mechanism protects only up to 90% of investors' funds in the case of financial problems in the insurance company. Trust, being a major financial player, collects money from private investors in a large financial purse. Investors give orders to the insurance company to buy an investment instrument for the specified amount. They can see the result and account balance in the personal account on the website of the insurance company. In jurisdictions such as Bermuda, an act on segregated accounts operates, which protects the investor's capital by 100% on special segregated accounts that are not involved in the bankruptcy process in the cases of problems with the insurance company. This kind of protection has forced many investors to reconsider their views from the Channel Islands to Bermuda.

After large-scale capital began to look for greater flexibility in management, a hybrid, PPLI or Private Placement Life Insurance, have been created. Unlike the prophet, PPLI has more opportunities for the investor, both in terms of liquidity, and in terms of penetration and management of exotic assets within the policy. With this comes all the further advantages.

Choosing an insurance company.

There are three main offshore jurisdictions of insurance companies offering ULIP and PPLI. Bermuda, the Cayman Islands and the Channel Islands. The features of these jurisdictions are as follows:

• Bermuda (UK Overseas Territory) use the act of segregated accounts for 100% investor protection. Bermuda is considered to be one of the largest insurance jurisdictions, where today it is not only difficult to obtain a new license for life insurance, but also to keep the historical level, as Bermuda introduces new natural filters to consolidate the insurance market and cleansing from risky players.

• The Cayman Islands (UK Overseas Territory) use the act of segregated accounts to protect investors' capital. The Cayman Islands are second on the list after Bermuda in terms of the quality of insurance. Often, those who once in the past could not obtain a license in Bermuda, turn to the Cayman Islands regulator, in connection with a more simplified licensing procedure. The Cayman Islands are famous not for insurance, but for the huge number of registered hedge funds. It is this jurisdiction that carries the banner of superiority in this category.

• The Channel Islands (UK territory) protect up to 90% of the investor's capital through mutual investment funds. This jurisdiction is more bureaucratized and to date, insurance companies from the Isle of Man or Jersey do not accept clients from Russia and the CIS.

In practice, when choosing an insurance company look at its history, because young insurance companies having an age of fewer than 10 years, did not manage to get the practice of closing the first policies opened for 10 years. In this regard, such insurance companies do not have a track record, and hence high guarantees.

Transparent and qualitative reporting of insurance companies displayed on the website or in case of listing on the Stock Exchange is another condition for choosing an insurance company that will limit the investor from possible unforeseen risks.

Bank of the Custodians.

ULIP, as a boxed solution has limited capabilities and one of the first is the investor's choice of a custodian bank, where the securities and money of the policyholder will be stored. In other words, the investor can not choose the bank he likes but should use the ready-made solution within the ULIP box. In practice, insurers selling ULIP have 3-4 banks into which they divide the assets of policyholders into types - simple securities, cash and derivatives.

PPLI, as an individual solution, enables the investor to choose his bank. In practice, PPLI Insurers already have a wide list of custodian banks to choose from. This does not limit him in choosing his bank, with which the investor already had a certain positive practice of interaction. The choice of the owner of the policy is limited only by the generally accepted sanctions lists and black sheets, which include a number of banks.

The choice of a custodian bank is not limited to Europe or other jurisdictions generally accepted for financial planning. An investor can choose a bank even in Russia to allocate its assets while having a foreign insurance policy. In other words, the investor's assets will be located in a Russian bank, and legally will be owned by a foreign insurance company that will provide the investor with a life insurance policy abroad. According to the law of the Russian Federation of 27.11.1992 N 4015-1 (as of 03.08.2018), as in many other countries, a foreign insurance company that does not have a license in Russia cannot engage in insurance activities on the territory of the country, but can open accounts for itself, like any other foreign company, to store its assets. Therefore, to date, this is the most valuable advantage of PPLI in comparison with ULIP for Russian investors considering the ways of getting back the capital to Russia. And for those who do not want to withdraw money from Russia, but at the same time worries about their fate, liquidity and address transfer future generations, taking into account the realities of the conjuncture of the local market. In addition, within PPLI the client has the right to change the custodian bank during the term of the life insurance policy, which can not be done within the framework of the Unit Linked Insurance Plan. Knowing this, in the case of PPLI, banks will always try to keep the bar of service in relation to the investor at the highest level. It is important to remember that the investor under the PPLI is not tied to the bank's boxed choice and has the right to determine its custodian bank in the optimal jurisdiction for further tax and civil planning. By selecting your bank for keeping assets under the life insurance policy, the investor gets a full range of these banks opportunities.

Anonymity.

In jurisdictions such as Luxembourg and Liechtenstein, banks, under the PPLI, does not give the ultimate policyholder to their system, that is, the client for them is an insurance company. This fact in a compartment with a special account type helps investors to remain anonymous in the context of automatic information exchange. It is incorrect to consider that all banks within the framework of ULIP and PPLI do this, as each bank and jurisdiction has its own peculiarities and this must be taken into account initially, so as not to fall under automatic exchange by using the wrong insurance company.

Management structure.

The structure of asset management through ULIP resembles a brokerage account where the policy owner sends orders to the insurance company to buy, sell or convert money. Some insurance companies in the ULIP provide an opportunity to open a real brokerage account in an already signed brokerage company for active trade through the terminal by the client himself, giving him direct access. The architecture of such policy is limited by exchange and sometimes over-the-counter instruments.

Unlike ULIP, within PPLI, an investor can also pack assets such as real estate or business, converting them into securities. PPLI, in this case, will act as a total holding structure for the investor's assets, which in the compartment with anonymity gives him a universal instrument for management and transfer by inheritance. Within the PPLI, the client can choose the broker for account opening and further trading.

Taxation.

A deferred tax payment applies to all types of life insurance policies with an open investment architecture. This means that the tax base will be determined only by the date of closure of the policy, the country of the tax residence of the policy owner and the annual basis for calculating the return on investment. In many countries, ULIP and PPLI provide tax optimization in the form of a benefit of up to 40%, which essentially saves investors' capital.

Crediting.

ULIP as a tool for the mass segment limits the investor in opportunities, for example, in obtaining a loan secured by assets within the policy or under the policy itself. Some insurance companies within the ULIP gives a minimum leverage to the policyholder for securities, but only for further reinvestment under the same policy. PPLI provides an opportunity to get a loan for the assets of the policy and dispose of them as an investor will conceive outside of it. The rates of such lending depends on the currency and the current situation with key rates in the world. Therefore, for example, today it is possible to obtain a mortgage loan in euros at 0.5% per annum under the PPLI.

Getting Citizenship.

PPLI enables the investor to choose a bank of custodians and jurisdiction. In connection with this, the assets under the policy can be used in the extract for obtaining citizenship in a particular country. There is no such possibility within ULIP.

Cost and Liquidity

When choosing an insurance company should be noted the cost of the service itself. ULIP, as a boxed solution, has fixed regular commissions, as they are aimed at a mass segment of investors that have a fee of $ 500 per month. In the case of PPLI (in practice these are customers of $ 1 million), regular commissions can be significantly lower, depending on the scope and objectives of the investor. In PPLI, an investor can pick up tariffs individually for himself, that within the investment strategy will create a favorable long-term planning.

With regard to liquidity, in case of early termination of the policy within the ULIP, the investor is obliged to pay the remaining commission for the entire administrative period. In other words, if a customer pays 1.2% policy fee per year, then after 3 years, the client will have to pay 1.2% * 7 years with a 10-year life insurance policy. In PPLI the client pays often only for the actual time spent in the policy. "Often" means that depending on the amount of capital of a private investor, tariffs for the insurance policy are calculated and the more the client is, the more flexibility will be given to him. PPLI allows the investor to be more liquid and at the right time to sell securities to exit without much expense. Another question is, for what purposes should these funds be deduced? If this is a purchase of real estate or business, then all this can be done also within the framework of the PPLI policy.

Indivisibility and Targeted Transmission.

Both instruments have identical protection against the claims of third parties, for example by court order or in case of divorce. If the issue of inheritance in Russia resolves by a long way of proving the ownership of the asset, then in the case of the life insurance policy, the asset is transferred to the beneficiary's rights. The procedure for entering into the inheritance, unlike the Russian 6 months, takes about 2-3 weeks. The definition of the tax base for heirs depends on whether the policy of the previously insured will be closed and the transfer of assets will occur through the opening of a new policy for the heirs or this will happen by transferring the existing policy of the previously insured.

Disadvantages - how to look at them?

• According to analyst Valentin Zhurba, Buying policies from a foreign insurer that is not registered in Russia is likely to create problems with taxation when the instrument is redeemed, as under Russian law, there is no preferential taxation for ULIP - http://www.forbes.ru / finansy-i-investicii / investment-2018366287-strahovoe-prikrytie-kak-anonimno-hranit-dengi-za-rubezhom - This dubious defect must be looked at differently. In the case that ULIP or PPLI had a legislative base in Russia, then it would be unlikely that this product would have such a demand from Russian investors. Many investors, on the contrary, consider those instruments that are separate from Russian jurisdiction, have international legal protection and allow the policyholder to plan their tax residence in advance. In particular, this applies to large investors in the PPLI framework.

• Ravil Miftahetdinov, a Partner, Head of Aton's key client's department, recalls that despite the anonymity of investments through ULIP policies, to purchase this product a Russian investor needs to undergo a rather complicated process of compliance by foreign insurance companies. "Sanctions are not conducive, but rather hampered to work with such instruments, as the attitude to Russian clients is currently special," the financier said. http://www.forbes.ru/finansy-i-investicii/investment-2018366287-strahovoe-prikrytie-kak-anonimno-hranit-dengi-za-rubezhom - Major Insurance companies, for example, Bermuda, conduct a standard check of Russian clients, with this having no prejudice to their citizenship. Insurance companies are conductors for all clients in the bank. So on average, opening an account for a client within the policy takes 3 weeks, and the standard opening of a bank account is for about 6 months and a refusal is possible at the end. To date, insurance companies of the Norman islands do not open Russian customers, not because of bias, but because of sanctions.

• High programs commission are seen as a drawback while forgetting that the investor receives an insurance policy with all the consequences and not just a bank account that needs to be declared and has all investigative risks. Investors who understand the essence of the instrument, its goals, the economic calculation of future behavior and all the benefits realize that 1.2% per year for the boxed solution is not expensive. At the same time, such investors understand that the PPLI policy also opens for capital gains, through investments in securities.

 Eldiyar Muratov for FORBES