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Unit Linked

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What are Unit Linked?

  • A Unit Linked is a multi-faceted insurance plan product that offers both insurance coverage and investment exposure in equities (listed or not listed) or other financial assets, so it is essentially a combination of insurance and an investment vehicle.

 

  • Like an investment vehicle, each Unit-Linked policyholder holds a certain number of fund units (hence the name), each of which has a net asset value that can be determined on a daily basis. Also like an investment vehicle, the aggregate premiums collected by the insurance company providing such plans is pooled and invested in varying proportions of debt and equity securities (in addition to part of it going towards insurance coverage).

 

  • Like an insurance plan product, any income generated inside the Unit Linked is not considered to be generated at the level of the policyholder until it is actually redeemed or otherwise payout.

 

  • Since the policyholder has a direct saying in how the premium are invested, it is adaptable to the most complex of situations and consequently is a great tool of wealth management.

 Main legal advantages

  •  The main legal advantages of a Unit Linked can be summarised as follows:
Flexibility Policyholders can decide on how and where their premiums are invested.
No minimum premiums Policyholders can usually decide on how much and when to inject into product.
Portability Policyholders can usually move between countries of residency without change to their policies.
Partial withdrawals Although the death of the holder is usually the main payout triggering event, the policyholder can opt for
partial withdrawals before that.
Asset protection Some countries, like Luxembourg, offer Unit Linked policy holders’ full protection against creditors, even foreign ones.

Main tax advantages 

  •  The main legal advantages of a Unit Linked can be summarised as follows:
Full tax deferral on
build-up		 Meaning no tax on income/gains before the payout/redemption (accumulation period).
Favourable tax rates for
delayed redemption		 Meaning that if the payout/redemption occurs after more than 5 years of the Unit Linked’s existence, there will be lower tax rates (11,2% to 22,4% instead of the usual 28%).
Stamp Duty exemption No Stamp Duty taxation on the payout/redemption in favor of the policyholder or other beneficiaries (but in this case, only for distributions upon death of the policyholder).
No exit tax There is currently no exit tax if the policyholder ceases to be a resident in Portugal while still having undistributed income.

Main legal and tax risks 

  •  The main legal and tax risks of a Unit Linked can be summarised as follows:
Liquidity Some policies might have some restrictions on how much and when capital and/or income can be withdrawn (usually a 5-year lock-in period).
Capital loss Unit Linked products don’t usually have capital loss protection, meaning that there will be no protections from bad investments.
Market risk If a Unit Linked is severally investment in securities and other volatile assets, the policy holder will naturally face the market risks entirely.
Costs Usually, Unit Linked products have high charges, specially at the beginning.
No double taxation elimination Meaning that if the income/gain generated inside the Unit Linked is taxed at source, the policy holder will not be able to deduct it against his gain upon redemption/payout.
Risk of requalification There is a risk –albeit of low occurrence –that some unproperly setup Unit Linked could be considered, in substance, mere investment accounts and consequently not benefiting from the Unit Linked tax regime.
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