Low interest rates in the last years have forced investors to accept higher risk and have incentivised the search for alternative investments, unlisted assets and generally non-traditional investments with the aim of obtaining larger profit margins.
According to a survey carried out by Preqin for SEI (2017), alternative investments have increased by 40% during the last four years, reaching a value of 7.7 billion dollars. The same trend in witnessed by a survey conducted by GFM Research for Intralinks (2017), which confirms that more than a third of investors have increased their exposure to this type of investments by at least 10% in 2017.
This trend is not foreign to portfolio managers, conscious of the need to obtain higher profit margins and satisfy the demands of their clients, especially those more sophisticated, by incorporating alternative investments and unquoted assets to their portfolios. Acheiving higher profit margins through investing in non-traditional assets is possible by subscribing to a unit-linked insurance plan and gaining the benefits that it brings. Certain limits need to be respected in the context of the plan but generally life insurance is a flexible structure for high net-worth clients especially when offered by insurance providers in Luxembourg.
Upon issuing the life insurance, the insurer will designate a manager to discretionarily manage the portfolio linked to the insurance policy based on a strategy that is pre-selected by the client. If the strategy includes investments in alternative assets, the manager will carry out the investment, which will become the property of the insurer, not that of the client. The client, through his/her insurance policy (to which the investments are connected), will however be the one who assumes the risk of investment and who can therefore benefit from possible future returns.
Investment in non-traditional assets through a unit-linked life insurance gives portfolio managers access to a wider variety of assets as some of these investments are only eligible for institutional investors such as insurers, and would otherwise not be directly accessible to clients.
In addition, life insurance can offer tax deferral of the income, that such investments would otherwise generate for personal income tax purposes, whenever a liquidity event or disinvestments occur. The client's reporting obligations and tax scheme are thus simplified regardless of where the investments are located. The remaining advantages of the insurance are of course applicable, such as the possibility of tax optimization with regards to inheritance and gift tax, succession planning opportunities and asset protection thanks to Luxembourg’s "Triangle of Security", one of the most secure asset protection systems in the world.
By Pablo Peciña
Senior Wealth Planner
Lombard International Assurance
This article was originally published in FundsPeople in Spanish