ILAS Is a Tax Avoidance Product for Expats, Unsuitable for Hong Kong Citizens

It seems that very few people are familiar with the fact that ILAS is a product designed to allow expats to avoid foreign taxes. Local Chinese don’t pay these taxes, so ILAS is useless to them and shouldn’t be sold to them. However, brokers and agents still aggressively promote it to locals because of the very lucrative commissions they earn from selling it. I’m writing this blog post hoping to inform the uninformed.

Expats often refer to ILAS as an “insurance wrapper” or “tax wrapper”. It is typically used to “wrap” mutual fund investments within an insurance contract in order to avoid capital gains and estate taxes in expats’ home countries. Financial advisers promote ILAS to expats for exactly this reason, and I suppose many of them claim that the tax savings offset the wrapper fees. However, the fees are so high on most wrapper products that it completely wipes out the tax savings. In other words, most of these products are ripoffs. Reuters has reported on this in an article entitled:Insurance Wrapper Costs Eat Tax Benefit”.

Hong Kong citizens don’t pay capital gains and estate taxes, which means they have no need to purchase a tax wrapper. One doesn’t have to be a genius to draw the following conclusion: If ILAS is a bad deal even for expats, then ILAS is an extremely raw deal for Hong Kong citizens, since they receive no tax savings to offset the high wrapper fees.

Selling a tax savings product to someone who receives no tax savings is like selling car insurance to someone who doesn’t own a car and doesn’t drive. It’s like selling snake oil.

That’s a summary. One can learn more by doing a Google search for “insurance wrapper”, which retrieves thousands of results. Below are several quotes that I pulled out of one such search: 

Insurance wrappers are life insurance policies into which the very wealthy place stocks, private equity holdings and other bankable assets, exploiting tax benefits on investment income held in such policies.”

“I will first look at the benefits of unit-linked life insurance, including the one most often cited—the tax-deferral benefit…It enjoys very favorable tax treatment in most if not all jurisdictions and can be used to preserve and increase wealth and pass it on to the next generation in a tax-efficient manner.”

“For expatriates who will return to the UK at some stage, they will shield the underlying investments from tax, just as described on the tin. It is possible to take out tailor-made life insurance contracts which can be used to own private investments such as the shares of an offshore company which is doing real business, properties as well as stocks, shares and funds. Such “insurance wrappers” can be a powerful planning tool and, again, shield the underlying assets from being taxed.”

“In most jurisdictions, this kind of structure is tax-deferred, meaning that for as long as your assets are invested within the structure, no income taxes, capital gains taxes or withholding taxes will apply. With proper planning, additional tax benefits can be achieved. Depending on your tax domicile, estate taxes, gift taxes or value added taxes can be avoided in compliance with the law. For example, in jurisdictions like Germany, Sweden, the United Kingdom, or South Africa, these products benefit from considerable tax advantages.”

The basic concept is that mutual funds and other tradable financial instruments can be ‘wrapped’ in an insurance policy to give it additional tax and estate planning benefits. These are insurance products in name only – the actual insurance coverage is only about 1% of the value of the portfolio, and investors don’t have to pay separate insurance premiums. 100% of capital passes right through to the investment funds. The result is a flexible, tax-efficient structure for investing in the same types of funds that most households are already using.”

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