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Unit-linked policies are life-assurance-based savings products in which contributions are invested in a portfolio of financial assets selected according to the client’s risk profile and chosen strategy. It is both a life assurance product and a savings solution.

As it is a life assurance policy, the person taking it out is entitled to appoint the beneficiaries of their choice. These beneficiaries will be awarded the funds associated with the policy, plus the contracted additional life cover, in the event of the death of the person or persons identified in the policy as the life or lives assured.

The payment to any beneficiaries will not form part of the policyholder’s inheritance, nor will it be publicly disclosed on death to heirs, as is the case with a will. This provides the client with the utmost freedom and privacy to dispose of the portion of his/her estate that is passed on under the policy, and to distribute it as he/she sees fit.

Furthermore, as the payment of the policy does not form part of any inheritance, the latter can be disclaimed without waiving entitlement to the former. Some estates involving the transfer of high-value, low-liquid assets have to be disclaimed by the heirs owing to a lack of cash.

In this respect, a policy also gives any beneficiaries rapid access to cash. Receiving an inheritance can be a long process, which, in some cases, can also involve outlay costs (e.g., inheritance and gift tax or “ISD” for its acronym in Spanish). By ensuring that your heirs receive a cash payment quickly, without the need for a protracted probate process, you are providing them with a cash injection that is often needed to prevent them having to immediately sell off illiquid assets (such as property) or facing a shortage of cash until the estate is settled.

Unit-linked policies also give the policyholder a certain degree of control over how and when their wealth is transferred. It is impossible to know when someone will die and when, therefore, their wealth will transfer to their heirs. However, some situations involve children or heirs that are legally incapacitated or not yet mature enough to manage all the assets properly. With life assurance, access to the part of the estate included in the policy can be restricted until, for instance, the beneficiaries reach a certain age or have received the prior agreement of a trusted third-party.

In this case, the payment of ISD is deferred until the beneficiaries have had the chance to claim payment of the policy from the insurance company. Therefore, beneficiaries whose access to the wealth has been restricted by the policy until they reach a certain age or until a certain amount of time has passed since the death of the policyholder, for example, are not liable to pay ISD until the term has expired or the condition set out in the policy has been fulfilled.

Last, but by no means least, it is important to mention that, as this product enables the policyholder to defer payment of personal income tax (“IRPF” for its acronym in Spanish), once he/she has died and the insurance company pays the value of the portfolio of financial assets associated with the Unit-linked policy plus the corresponding additional life cover to the beneficiaries, the latter are liable to pay ISD. However, up until that point, the policyholder will have made tax savings on the IRPF they would have had to pay annually if they had held the same portfolio directly.


By Pablo Peciña

This article was originally published on FundsPeople.com in Spanish.