Wealth protection for Peruvian HNW clients through a Luxembourg Unit-Linked life policy

Effectively preserving, protecting and passing on wealth to the next generation is one of today’s most significant concerns for global high net worth individuals, including Peruvian residents. This involves designing diversified and robust investment portfolios, as well as including wealth preservation and asset protection elements which help maintain financial security. Having the proper solution in place provides an appropriate level of comfort to one’s long term financial future, no matter the circumstances and external environment.

Based in Luxembourg, a triple A-rated jurisdiction 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 Unit-Linked life insurance contract. The solution we have designed for Peruvian residents is adapted to meet the legal requirements of life insurance in Peru.

It allows clients to benefit from a set of legal and tax advantages (personal income tax deferral, smooth transfer of insurance proceeds free of tax to appointed Peruvian-resident beneficiaries, etc.). All assets held within the Unit-Linked life insurance contract are protected (i) against seizure by third parties, including the State, in Peru and (ii) against potential failure of the insurance company or the bank holding the underlying investments.

Asset protection against seizure by third parties

The assets under a life policy are protected against seizure by any creditors of the policyholder (e.g. as a consequence of client bankruptcy or, in general, a legal claim based on the client’s personal or professional liability). Should a Peruvian Court 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 Peruvian 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 if the policy was set up fraudulently (for example, after the policyholder knew of ascertainable creditors).

In sum, Peruvian residents’ wealth is protected against Peruvian law related risks (e.g. potential future claims from creditors, even from the State) when it is secured in a life insurance policy in Luxembourg.

Wealth preservation through the Triangle of Security

Moreover, Luxembourg 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. This policyholder protection regime is known as the “Luxembourgish Triangle of Security”.

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 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.

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.

Case Study

The situation:

A Peruvian national, resident in Lima, married with two children (aged 15 and 18), currently holds a foreign account for a value of USD 5m in securities and other financial assets. He runs a successful business in the real estate industry but is worried of the current instability in the country.

The objective:

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 was to happen in the future where he would need to respond personally.

The solution:

Together with his trusted advisers, Lombard International Assurance tailors a Peruvian-compliant wealth planning solution using Unit-Linked life insurance, which is tax efficient and ensures that the client’s private wealth can be transferred according to the client’s wishes and free of tax to the next generation. The client does not need to worry about any insurance company’s or custodian bank’s risks thanks to Luxembourg’s “Triangle of Security”. And he further protects this part of his wealth against any potential future seizure by third parties, including the State, on the basis of personal or professional liability (e.g. in case he faces claims in the future, the USD 5m 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).

This case study illustrates how a Luxembourg Unit-Linked life insurance policy is an excellent solution for Peruvian residents to make sure their wealth is protected, preserved and can be passed on efficiently over to the next generation.