Wealth preservation is one of today’s most significant concerns for high net worth individuals. It should not only involve planning for the distribution of financial assets and diversifying investments, but it should also include wealth preservation and asset protection to help maintain financial security. With the proper solution in place, a client can feel more comfortable about his or her long term financial future, no matter what happens.
Based in Luxembourg, with one of the strongest policyholder protection regimes in Europe, Lombard International Assurance specialises in designing wealth structuring solutions based on a flexible yet secure life insurance contract. The solution we offer our Turkish clients is adapted to meet the legal requirements of and to benefit from all possible legal and tax advantages available to foreign life insurance in Turkey (for example, personal income tax deferral; smooth transfer of insurance proceeds to appointed beneficiaries; avoiding lengthy probate procedures; etc.). In all cases the assets held within the life insurance contract are protected (i) against potential failure of the insurance company or the bank and (ii) against seizure by third parties in Turkey.
Thanks to Luxembourg’s unique policyholder protection regime, the Grand Duchy offers maximum security through a State controlled policyholder protection regime that ensures the legal separation of policyholders’ assets from the insurance company’s shareholders and creditors. Furthermore, the policyholders’ assets are held by an independent custodian bank that is required to “ring fence” the assets and is bound by the regulator’s legal powers to protect the assets on behalf of the policyholders.
If the custodian bank or insurance company should fail, such securities remain in segregated policy accounts and are protected for the benefit of the owners and beneficiaries of the life policies. This policyholder protection regime is known as the “Luxembourgish Triangle of Security”. This legal protection, linked to the fact that Lombard International Assurance exclusively issues unit-linked (not guaranteed) life assurance policies, ensures that clients will not be exposed to situations where adverse investment markets impair the insurer’s liability to meet its obligations vis-à-vis policyholders. This is key for private clients, as insurers that offer other types of solutions carry this potential risk (i.e. non-linked business where the investment risk is borne by the insurer may very well undermine the insurer’s solvency capacity vis-à-vis the policyholders of the unit-linked business).
Should any problem arise with the insurer or the custodian bank, the Luxembourg Insurance Regulator, the Commissariat aux Assurance (“CAA”) is fully empowered to immediately block and “freeze” the assets linked to life policies. This was already in place when a number of Icelandic banks collapsed at the end of 2008. At the time the CAA used its powers to freeze the segregated custodian accounts with affected banks and ordered the transfer of all assets and cash to other banks. The securities of the first policies were transferred within five weeks, the bulk of them within four months, and the balance within twelve months.
Moreover, the assets under a life policy are protected against seizure by any creditors of the policyholder (e.g. as a consequence of client bankruptcy, public receivables payable by him/her or, in general, a legal claim based on the client’s personal or professional liability). Although a Turkish Court could decide to seize a policyholder’s claim against the insurance company for his/her life policy, effective access to the value under the policy could only take place if the policyholder allowed it.
If the Turkish Court decision was to become enforceable in Luxembourg through an exequatur procedure, any subsequent decision by the policyholder to surrender the policy would require any amounts payable to be paid to the creditors. However, article 114 of the Luxembourg Law on the Insurance Contract clearly establishes that the right to partially or fully surrender a life policy is exclusively of the policyholder; and creditors cannot possibly force a policyholder to exercise it. In other words, policyholders’ creditors may seize the claim the policyholders have against the insurance company to recover the cash value of the life policy, but those creditors will not receive any payment as long as the policyholder does not freely decide to exercise his/her right to claim that value back.
Furthermore, the creditors of the policyholder may not seize the policy itself, and any payment to the beneficiaries due to the death of the life assured in the policy (usually the policyholder) will not be for the benefit of the creditors, but reserved for the beneficiaries appointed in the life policy. The only exception to this rule would be in the case that the premium paid by the policyholder represents an exaggerated portion of his/her wealth or the policy was set up fraudulently (for example, after the policyholder knew of ascertainable creditors).
Please find below a Case Study illustrating this:
A Turkish national, resident in Istanbul, married with two children (aged 15 and 18), currently holds a foreign account for a value of USD 10m in securities and other financial assets. He runs a successful business in the real estate industry.
The client would like to set up a fully legal & compliant wealth-planning solution which is tax-efficient and ring-fences this part of his wealth for the benefit of his children, even if something were to happen in the future and he needed to respond personally with his wealth for his company’s liabilities.
Lombard International Assurance tailors a Turkish-compliant wealth-planning solution using life insurance, which is tax-efficient and ensures the wealth will be transferred according to the client’s wishes. The client does not need to worry about insurance company risk thanks to Luxembourg’s “Triangle of Security” and Lombard International Assurance’s unique business model. And he protects this part of his wealth against potential future seizure by third parties on the basis of personal or professional liability (e.g. in case he faces difficulties with his company and files for bankruptcy in the future) the USD 10m in the life policy would still be protected for the future benefit of his children, as long as the father does not access the policy value himself during his lifetime.
In sum, Turkish residents’ wealth is protected against Turkish law related risks (potential future creditors’ claims, even from the State) when it is secured in a life insurance policy in Luxembourg.
By Pablo Peciña, Senior Wealth Planner
For further information, please contact your usual Lombard International Assurance representative.