Quite recently we experienced some incredible changes to the American financial system. Lehman Brothers collapsed and filed for bankruptcy protection. Fearing the same fate, Merrill Lynch agreed to be acquired by Bank of America. Not to mention that Fannie Mae and Freddie Mac were “nationalized”. And – perhaps most importantly – the U.S. government bailed out AIG. While all these events serve to remind the world of just how uncertain the future is, the AIG debacle certainly hit closest to home. The failure of America’s largest insurer is leading everyone to think twice about where they get their insurance and where they make their investments. This is especially true if you have been building an annuity or other insurance policy for your long-term needs with an American insurance company.
With an unstable financial system and media sources that cannot be trusted to report what is really going on in the American economy, it is impossible to know whether your insurer or bank is safe from the threat of insolvency.
But it is not the end of the world. On the contrary, it can be the beginning of a whole new world of opportunities. And that is because this crisis has definitely shifted Americans’ perspective on asset protection and foreign investment.
The playing field has changed. American financial institutions – particularly insurers – may or may not be safe, and it seems like there is no way to tell. So what is the alternative?
Offshore Insurance Companies
In jurisdictions like Switzerland and Liechtenstein insurance companies are among the safest in the world. In the entire history of almost 160 years in the industry, no life insurer has ever failed to meet its obligations. The same safe history applies to insurance companies domiciled and operating out of Isle of Man. A jurisdiction which has been awarded an AAA rating by Standard & Poor and Moody’s for its economical and political stability.
The security of these institutions is due in large part to the conservative regulations they are forced to live up to. They are much more limited than American companies in terms of the guarantees they can give and how they are allowed to invest. Unlike their American counterparts, the supervisory authorities carefully monitor and constantly supervise the insurers.
But even if the impossible were to happen and a Swiss, Liechtenstein or Isle of Man insurer becomes insolvent, your money is still safe. An insurance company located in these jurisdictions has, as a part of its general insurance law, a “separate account” statute which provides legal protection for your offshore investments. A separate account statute stipulates that, when a policy is issued, the investment assets are maintained in a separate segregated account and the assets can only be used to satisfy the policy obligation.
This means your annuity assets are completely separate from the insurer’s balance sheet. So even if the insurer fails, your assets will remain protected. This is a promise that American insurers really cannot make at this point.
Furthermore, for life assurance companies, the Isle of Man has the only statutory compensation policyholder protection scheme offered by any offshore financial centre. The Life Assurance (Compensation of Policyholders) Regulation of 1991 provides up to 90% of an insurer’s liability to the policyholder in the unlikely event that a local insurance company should become unable to meet its obligations. There is no upper limit to the amount of this protection.
Suitable products for the U.S. Investor
International fund managers normally do not accept U.S. investors as clients, due to onerous regulatory and reporting requirements by the U.S. authorities.
However, one of the most common vehicles for U.S. investors to access these funds is via an offshore annuity or life insurance. Clients are already aware of the advantages of insurance products – these include tax efficiencies, estate planning, asset protection and the various types of investments which qualify within life insurance products and annuities. Offshore investing can also be one of the most effective ways of transferring financial assets to family and dependents, including estate planning.
Furthermore insurance companies domiciled and operating outside of the United States can provide a wealthy and sophisticated investor access to reasonably priced variable annuity contracts and life insurance policies. These companies are not subject to the massive overhead typically associated with U.S. life insurance companies, such as large distribution systems and multiple layers of government regulations.
Depending on the policy amount (minimums starting at US$500,000), a large number of investment opportunities are available. A client will certainly find attractive non-U.S. dollar related investments, which are ideal as a hedge against potential dollar weakness and to further diversify the investment portfolio.
Based on expectations of return, risk tolerance, currency preferences, investment horizon, etc., a suitable asset allocation will be tailor made to fit the needs of a client.
Conclusion: Investing in the global markets via a safe and cost efficient vehicle such as an insurance contract, underwritten by a well-known international insurer, will bring you peace of mind plus the extra benefits of diversification, asset protection, privacy, investment flexibility and estate planning.