Foreign life insurance policies offer route to create wealth offshore

South African expatriates holding rand-denominated life insurance policies should consider converting them to the dollar, which would offer the holder and his / her beneficiaries a hedge against the volatility of the rand. The proceeds may also be exempt from South African Estate Duty.

The dollarisation of South African life insurance policies enables South Africans who have chosen to move or work abroad to match their liabilities overseas – mortgages, loans, education costs, healthcare costs or estate duty – in a foreign country and neutralise the financial impact of a life-changing event. Some domestic policies do not offer disability cover for South Africans that have relocated abroad.

And if a ‘whole life’ policy has been taken out, rather than a ‘term life’ insurance policy, it also includes a cash value component that offers a strategic route to build wealth offshore. A policy has cash value when a portion of the holder’s premium dollars are invested and this sum can grow over time on a tax-deferred basis, without the holder having to pay taxes on the gains.

A whole life policy’s cash value provides a number of benefits that a policy holder can use during their lifetime. They can borrow money against the policy’s cash value in the form of loans or withdrawals, use it to pay premiums, or even surrender it for cash to supplement their income in retirement. Some whole life policies can also earn annual dividends – a portion of the insurer’s profits – which can further increase the cash value and provide other benefits.

While rand-based life insurance policies are deemed an asset in the estate of a deceased and are therefore subject to South African Estate Duty, offshore life policies – if correctly structured – are generally not within scope.

South African Estate Duty is levied on the qualifying value of an estate at a rate of 20% on the first ZAR30 million and at a rate of 25% above. The addition of any domestic life policies into a person’s Estate Duty calculation can therefore create a significant increase on the Estate Duty payable.

Additionally, dollar-based life insurance policies can pay out to an offshore trust or individual, so there will be no foreign exchange issues and no tax clearance requirement, while premiums can be funded from an offshore dollar account. They are also commonly used to structure buy-and-sell agreements between shareholders based abroad.