November 16, 2020
The Swedish banking crisis of 1992, the Asian financial crisis of 1997, the Dot-Com crash of 2001 or the world financial crisis of 2008…. With these crises and now the unprecedented times we are experiencing under the Covid-19 pandemic combined with other turmoil that may come in the future, protection has never been as important: health protection for ourselves and our family, of course, but also protection of capital for ourselves and the next generation. This is where life assurance fits perfectly as protection is part of its DNA.
Life assurance in a nutshell
A life assurance contract is an agreement whereby one party, the life assurance company, commits itself, against payment of a premium, to another party, the policyholder to provide a benefit (payment to the beneficiary) on the happening of an uncertain event (the death of the life assured).
How are clients’ assets protected with a Luxembourg life assurance contract?
By subscribing a policy, the policyholder pays a premium, which is invested in underlying assets linked to the life assurance policy. These underlying assets (the “technical provisions”) must be held at an independent custodian bank on a separate account from the assets of the life assurance company and of the bank itself.
The custodian bank must be approved and monitored by the Luxembourg insurance regulatory authority, the Commissariat aux Assurances (CAA). The CAA also thoroughly monitors each life assurance company’s solvency ratio rules.
This whole protection framework is called the Triangle of Security, a Luxembourg specificity in terms of protection that does not exist anywhere else.
What would happen in case of a policyholder’s personal financial difficulties?
The assets of the policyholder are protected at any time against the claim of potential creditors. Indeed, the rights to surrender or pledge of the policy will lie exclusively with the policyholder1. Therefore, these rights cannot be seized or exercised by the creditors of the policyholder, nor can the former force the policyholder to exercise them to their benefit.
By the same reasoning, the policy as such cannot be seized or blocked by any third party or creditor as the policy and its underlying assets are duly booked in the name of the insurer. On this point, it is worth mentioning that whenever a policyholder subscribes to a Luxembourg life assurance policy, the legal ownership is transferred to the insurer.
As a consequence, the policyholder is granted full protection unless he/she would make partial or full surrenders of his/her policy and the proceeds / cash would be paid out to the personal account of the policyholder. From that moment onwards, the cash/financial assets would not be held anymore under the policy and the protection of the Luxembourg insurance regime would cease to apply.
Finally yet importantly, it should be mentioned that the considerations above will apply unless the premiums contributed to the policy are clearly excessive with relation to the overall wealth situation of the policyholder or have been done with fraudulent purposes, especially to hide/divert assets from legitimate claims from third creditors.
As a summary:
-Luxembourg offers a unique framework in terms of investor protection with the Triangle of Security
-The nature of the life assurance policy is strictly linked to the principle of unseizability. Further to Luxembourg Law on Insurance Contracts, the rights to surrender are exclusively tied to the policyholder and cannot be exercised by third parties, including possible creditors
-The Luxembourg regulatory regime applicable to life assurance products ensures full confidentiality to the policyholders, i.e. the contract is not publicised in a public/official register
-Beyond protection, the Luxembourg regime allows investors to access a wide range of financial assets according to their profile and financial objectives
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