A unit-linked life insurance contract is commonly defined as a product associated with one or more investment funds, qualified as ICAE – Instrumento de Captação de Aforro Estruturado (Structured Savings Collective Instruments), whose objective is providing for the payment of a capital sum in case of survival or in the case of death of the insured person. This product, due to its characteristics, is designated as a complex financial product under Portuguese law.
Significant case law establishes that life insurance contracts connected with investments funds, called unit-linked products, are structured savings collective instruments which assume the legal qualification of life insurance contracts”.[1].
Qualifying as a life insurance contract, the unit-linked product offers privileged options in the context of succession planning due to its flexibility when preparing beneficiary clauses, the integration of certain assets and specific provisions requested by the policyholders at the time of subscription.
Each case has its unique factors and the possibilities of structuring and conceiving the relevant beneficiary clauses are multiple and can be complex or simple depending upon the will of the policyholder.
Nevertheless, the flexibility provided by the life insurance contract to the policyholders regarding the preparation of the beneficiary clauses, and which results from the principle of contractual freedom, it is necessary to comply with the rules contained in the laws of succession.
The policyholders can obviously at any time amend the beneficiary clause and therefore establish a new clause fundamentally different from what was provided before, except in case of irrevocable and/or accepting beneficiary clauses.
The beneficiary clause is considered irrevocable when the policyholder irrevocably designates the beneficiaries and therefore renounces to the rights under the contract in his capacity as policyholder. The same applies whenever there has been express acceptance of the benefit by the beneficiary. In both cases, any change to the contract will require the express consent of the beneficiary.
In the scope of succession and estate planning, the unit-linked contract is a product that allows the allocation of corporate structures (namely family) and their respective structuring through the unit-linked thanks to the possibility of investing in traditional and/or complex financial products such as the integration of a RAIF (Reserved Alternative Investment Fund), hedge funds, unquoted assets, among others. Policies issued by Luxembourg insurance companies may invest in a wide range of financial assets in accordance with Circular Letter 15/3 of the Commissariat aux Assurances[2].
The insurance contract has a favourable tax regime, namely:
- Upon death of the insured person – the beneficiary shall not be subject to inheritance tax;
- In case of donation made in direct line – not subject to tax;
- In case of surrender, income from life insurance contracts concluded with non-resident entities without a permanent establishment in Portugal shall be taxed in the Income Tax pursuant to the provisions of articles 5(3) and 72(1)(d) of the Personal Income Tax Code ("IRS"), in the following terms:
- the positive difference between the amounts paid as surrender of insurance and life insurance and the related premiums paid or sums invested is classified as return on capital (Category E) for the purposes of that tax;
- income is subject to taxation at the special rate of 28%;
- if the amount of the premiums in the first half of the term of the contract represents at least 35% of the total amounts invested:
- and the surrender occurs after 5 years and before 8 years of the contract, only four-fifths of the income is taxed, which corresponds to an effective tax rate of 22.4%.
- and the surrender occurs after 8 years of validity of the contract, only two-fifths of the income is taxed, which corresponds to an effective tax rate of 11.2%.
In the Portuguese environment, these factors make the unit-linked life insurance contract particularly attractive, for purposes of succession and estate planning, both for residents and for foreigners who wish to establish their residence in Portugal.
Baloise Vie Luxembourg has a team of experts in the area. Do not hesitate to contact us for more information on the possibilities of planning your assets within the framework of a unit-linked life insurance policy and on the advantages of the solutions offered by Baloise Vie Luxembourg.