Growth in Luxembourg’s life assurance sector is increasingly driven by the practice of establishing life contracts using a Luxembourg legal entity.
Luxembourg life-assurance products offer a unique level of protection to the investor, a high degree of flexibility with regard to contract design and asset management, complete tax neutrality and confidentiality guaranteed by law. These advantages make the Luxembourg life insurance contract one of the best tools available for asset management and succession planning for wealthy European and international clients.
The applicable tax rate for both subscribers and beneficiaries of a Luxembourg life assurance contract is that of their country of residence and life assurance enjoys favourable tax treatment in most European countries. Luxembourg charges no tax on premiums, nor on capital gains made at the time of the contract’s purchase or expiry nor on death benefits. Luxembourg life assurance contracts are designed to respect the legal and tax requirements of the subscriber’s country of residence.
With regard to the distribution of life assurance products, banks account for a very significant proportion of sales, whereas the use of brokers is negligible.
Luxembourg’s legal and regulatory framework gives life assurance companies substantial investment flexibility, allowing them to offer their clients a wide range of sophisticated products.
Traditionally, life assurance companies offer guaranteed return products, where premiums are managed in the insurance company’s general fund or in that of the mother company.
In addition, Luxembourg firms offer a wide range of so called “unit linked” products that are based on one of the following:
- External investment funds, managed by experienced asset managers;
- internal collective funds, which operate like undertakings for collective investment in transferable securities (UCITS) and which allow mandated collective management tailored to the different risk profiles of investors;
- internal dedicated funds that permit discretionary, mandated management that takes the subscriber’s personal objectives into account. Several dedicated funds can be grouped within the same life assurance contract.
The possibility of diversifying assets held in a life assurance contract increases in proportion to the amount invested and the type of funds chosen. Hence, the range of potential assets widens from national or international equity, money market and bond funds, through alternative funds and structured products, and goes as far as integrating portfolios of listed and non-listed securities.
The management strategy can be changed at any moment throughout the life of the contract.
With the aim of ensuring maximum security for subscribers to Luxembourg life assurance contracts, the law stipulates that assets matching an insurer’s liabilities must be deposited with a bank approved by the insurance industry regulatory authority, the Commissariat aux Assurances (CAA). Each life assurance company is required to sign a depositary agreement with a custodian bank and have this agreement approved by the CAA.
This mechanism, known as the "triangle of security", ensures that the assets matching the insurer’s liabilities are clearly separated from the company’s other assets and lodged in a separate bank account. Client assets are thus legally separated from those of the insurance company’s shareholders and creditors. Furthermore, the custodian bank itself is required to segregate assets and to protect the interests of subscribers to a life assurance contract.
The law of 6th December 1991, as modified, grants subscribers to a Luxembourg life assurance contract the status of first ranking creditor on all assets in the technical reserves. This privilege, which is known as the "super privilege", takes precedence over all other creditors, whoever they are, granting contract holders priority in the recovery of credit related to the execution of their insurance contracts in the event of the insurance company going bankrupt.