The Swiss Insurance Industry and Annuities
One of the most important financial sectors of the Swiss economy is the insurance industry. Like Swiss banks, insurance companies are conservative and provide excellent safety for investors. In the past 130 years, not a single insurance company has failed; this is a record that even Swiss banks envy.
The insurance industry in Switzerland benefits from both unique tax advantages and knowledgeable and conservative management. The combination leads to solid and surprisingly productive investment opportunities. Some people equate a conservative approach to investments with low or marginal returns, but this is not the case with Swiss insurance companies. The returns from these companies are quite high, because the companies seldom have to deduct losses on bad investments which decrease the yield. Without losses it is possible to maintain a conservative approach to investment with high returns.
Switzerland has only about 20 insurance companies. All of them are very solid and well managed. Swiss insurance companies do not engage in rate competition, and instead focus their energies on maintaining their strength. Because the insurance industry is somewhat concentrated, it is, on the whole, stronger, and easier to supervise than the insurance industry in the United States where there are thousands of companies to regulate.
The Swiss Federal Bureau of Private Insurance regulates the insurance industry in Switzerland. It has the reputation as being a strict regulator. A clause in the Swiss federal constitution in 1885 established the regulation of private insurance companies.
Because the Swiss government regulates the insurance industry tightly -- as it does with all of the finance industry -- investments in any of the products offered by Swiss insurance companies carry an extremely low risk. Indeed, the risk level has been described by some as being no risk at all. For example, liquidity and valuation of investments are ultra-conservative. A maximum of 30% of investible funds may be put in real estate. This is a very low percentage, especially in a country where real estate has always held high values. Consequently, exposure to any downturn in real estate prices is limited.
During the eighties and into the early nineties, undoubtedly many American banks and insurance companies have been sorry they did not follow a real estate investment policy like their Swiss counterparts. And if the banks and insurance companies aren't wishing it, certainly their policyholders are, because when the value of real estate dropped virtually throughout America, the values of many investments dropped accordingly. Some portfolios that were over-extended in real estate were ruined.
The Swiss insurance companies go a step further in the effort of protecting their investors. Often they carry their real estate holdings at less than half of the holdings' present market value. This wide margin allows for a significant downward spiral in prices and value in real estate before the safety of investments is affected.
The Swiss also handle their accounting in a conservative manner. Unlike many American companies that tend to overvalue assets in order to achieve high prices in the stock market, Swiss insurance companies frequently have hidden reserves of millions of dollars.
Swiss insurance companies offer a variety of investment opportunities. Many offer more products than do Swiss banks. Perhaps one of the best products offered by Swiss insurance companies is the annuity.
Although most investors have heard of annuities, many do not realize the excellent opportunities for growth that annuities, particularly Swiss annuities, offer. An annuity is an investment vehicle that enables the investor to set money aside for retirement, or other objectives in a tax-advantaged plan. One of their most important benefits of annuities is that they permit the investor to defer taxes on his or her savings, thereby building assets faster than can be done in other investments. While annuities can be used to put money aside for various purposes, most often they are associated with retirement accounts.
This is not a coincidence. Several features of annuities make them especially attractive for a retirement plan, including:
- Annuities provide excellent security for the investor's family. If the annuity owner dies before the earnings of the annuity are distributed, his or her beneficiaries can receive the full value of the annuity. In some instances, by naming a beneficiary the annuity may be able to bypass probate and avoid the resultant costs.
- Investing in annuities is easy. Record-keeping is little more than monitoring the statements you periodically receive.
Annuities may not be the most exciting investments, but they are one of the financial industry's fastest growing products. Although annuities have been available since the early 1970s, the last few years have witnessed an explosion in the growth of annuity sales.
In the U.S. for instance, sales of domestic annuities are approximately $50 billion per year. As the American population ages, they are realizing that it is necessary to plan for retirement. One of the best investment alternatives available is the annuity. Many people perceive annuities as an investment that can help them to remain self-sufficient throughout their retirement years.
Sometimes people confuse an annuity with a mutual fund. There is an important difference. An annuity can offer investment growth similar to a mutual fund, but it defers taxes until retirement. A mutual fund does not. The annuity plans, of which there are many, can be structured so that, once the investor begins to draw on the funds, they make regular payments for life.
Although the investor doesn't own the investments the annuity makes, he benefits from their investment. Since the insurance company owns the investment, the investor's savings can grow, with all the gains being tax-deferred. This is an advantage that owners of most mutual funds are prevented from taking. When an investor buys a mutual fund, at the end of the year he or she pays a capital gains distribution. Even if the investor reinvests the gains, this is a taxable event. With an annuity, however, any profit made that is left in the annuity continues to grow in a tax-deferred state.
Since annuities are products of insurance companies, the fees paid by the investor are different than the fees paid for mutual funds. For most annuities, there are no front-end load fees or commissions. Instead there are "surrender" charges for investors who withdraw funds early in an American annuity. Surrender charges apply usually during the first five or six years. It should be noted that this is not the case in Swiss annuities, which will be discussed later in this book.
When annuities are compared to other investment alternatives, especially when one is looking for an investment through which to accumulate savings for retirement, annuities clearly become the product of choice. Annuities, without question, are safe, solid investments.
- The Advantages of Swiss Annuities
- The Many Benefits of Swiss Annuities
- Swiss Annuities and Flexibility
- Swiss Annuities and the Legal Protection of Assets
- The Security Provided by Swiss Law
- Maintaining a "Bank Account" with a Swiss Insurance Company
- Swiss Annuities and U.S. Taxes
- Utilizing the Services of a Swiss Investment Consultant
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The Advantages of Swiss Annuities
Not all annuities are the same. Unlike in the U.S., Swiss annuities are heavily regulated in an effort to avoid any potential problems. Frankly, Swiss annuities reduce the risks that U.S. annuities carry. Swiss annuities are denominated in the solid Swiss franc (backed by gold), while U.S. annuities are backed by the dollar, which has been losing purchasing power throughout this entire century. Additionally, the Swiss payout is guaranteed.
Swiss annuities are quite attractive for other reasons as well. They are exempt from the 35% withholding tax that Switzerland imposes on bank account interest received by foreigners.
The 1% U.S. excise tax on the purchase of foreign insurance products (including annuities) does not apply to Swiss annuities, as the Swiss-U.S. double taxation treaty eliminates this tax.
It is important to note that Swiss insurance companies do not report purchasing information -- not the purchase of the policy, not the payments into the policy, nor the interest or dividends earned -- to any government agency in Switzerland or the U.S.
Payments of Swiss annuities are flexible and can be arranged to fit the investor's needs. While annuity payments are denominated in Swiss francs, the investor may receive them in any currency he or she wishes. Payments can be converted at the investor's bank in Switzerland, or the investor may instruct the insurance company to make the conversion. Payments can be received annually, every six months or quarterly. Although a monthly option is available, it is restricted to Swiss residents. Payments can be sent anywhere in the world or sent to the bank of the investor's choice. Most North Americans prefer to receive their annuity payments by check in U.S. dollars.
One of the mainstays of Swiss annuity plans is their confidentiality. Another is their safety. A third is their flexibility. Together these factors combine to make Swiss annuities excellent investment choices. But there are even more reasons to choose Swiss annuities.
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The Many Benefits of Swiss Annuities
Swiss annuities offer a variety of important benefits to investors. Following are some of the most valuable:
- Competitive interest rates and dividends. You will find that Swiss annuities pay excellent rates and dividends compared to similar investments.
- Famous Swiss financial safety. Switzerland is financially one of the soundest (if not the soundest) countries in the world. Its currency is backed by gold and is considered to be the most solid among the world's industrialized nations. The Swiss insurance industry has not had a failure in 130 years.
- No foreign reporting requirements. As with all their financial transactions, the Swiss elevate privacy to a priority. A Swiss franc annuity is not a "foreign bank account," and subject to the reporting requirements on the IRS Form 1040, or the special U.S. Treasury form for reporting foreign bank accounts. Furthermore, the transfer of funds by check or wire are not reportable under U.S. law by individuals. The reporting requirements apply only to cash and "cash equivalents," including items such as money orders, cashier's checks, and traveler's checks.
- No forced repatriation of funds. Some investors pay little attention to exchange rates and controls, but those very rates and controls can exercise a major impact on the profitability of one's investments. Suppose that the U.S. government was to institute exchange controls that required overseas investments to be repatriated to the U.S. This has happened often in the past with other nations whenever governments have imposed exchange controls. Insurance policies would likely not be covered under any forced repatriation because they are considered to be a pending contract between the investor and the insurance company. (Note that Swiss bank accounts would probably not escape such controls.)
- Instant liquidity. An investor can liquidate up to 100% of his or her account without penalty after the first year. During the first year, there is a SFr500 charge.
- Protection from creditors. Swiss annuities are entirely protected from a host of creditors. If the annuity purchaser's wife or children are named as beneficiaries, no creditor, including the IRS, may seize or attach a Swiss annuity. Liens may not be attached to the annuity in any way. Thus, the investor is assured that the wealth contained in his or her annuity cannot be touched by any individual or government agency, and that the funds in his or her annuity will in fact go to designated heirs.
- No Swiss tax. Swiss franc annuities are free from Swiss taxes. If, however, the investor accumulates Swiss francs through other types of investments, he or she will be subject to the 35% withholding tax on interest or dividends earned in Switzerland.
- No load fees. Investment in Swiss annuities offers the advantage of no load fees, front-end or back-end. In addition, the investor can cancel at any time, without a loss of principal, and with all principal, interest and dividends payable if canceled after one year. If the investor cancels during the first year, he or she is subject to a small penalty of about 500 Swiss francs, plus the loss of interest.
- Qualified for U.S. pension plans. Swiss annuities can be placed in various U.S. tax-sheltered plans, including IRAs, Keogh, or corporate plans. Such plans can also be rolled over into a Swiss annuity. If you wish to put a Swiss annuity in a U.S. pension plan, the only thing required is a U.S. trustee -- a bank or similar institution -- and that the annuity contract be held in the U.S. by that trustee. For a minimal administration fee many banks offer "self-directed" pension plans, which can easily be used for this purpose. A U.S. firm that provides assistance in placing Swiss annuities in qualified retirement plans is Asset Strategies International.
- Convenience. Managing a Swiss annuity is as easy as managing an annuity in the U.S. You can send your deposits to Switzerland in the form of a personal check in U.S. dollars. To send the envelope overseas, you need 60¢ postage (at the time of this writing), or you may transfer funds by bank wire.
Swiss annuities are a unique investment product. Officially labeled annuities, they function more like a savings account than a deferred annuity.
The earnings of Swiss annuities are impressive compared to similar products. Swiss annuity accounts achieve about the same return as long-term government bonds in the same currency in which the account is denominated (in the case of the ECU European Union bonds), less a half-percent management fee. Like other Swiss investment products, Swiss annuities benefit from the same government regulations. For example, regulations protect investors from both under-performance and overcharging. The Swiss insurance company guarantees both interest and dividend income.
When the account matures, the investor has several options.
- He or she can select a lump sum payout.
- He or she may decide to roll the funds into an income annuity.
- The investor may simply choose to extend the scheduled term by giving notice in advance of the originally scheduled date.
Another important feature of Swiss annuities is instant liquidity. Most annuities don't offer this. In a Swiss annuity account all capital, plus all accumulated interest and dividends, is accessible after the first year without penalty. During the first year, 100% of the principal is freely accessible, less a SFr500 fee, and loss of interest. Unlike most American annuities, if you need your funds for an emergency or wish to make another investment, you are not prevented from obtaining your money and you are not subjected to high penalties.
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Swiss Annuities and Flexibility
Most people buy annuities so that they will have a constant source of income during retirement. The Swiss realize that the needs of people differ and so they have developed a variety of options for both single and joint annuities.
When you consider the various options annuities offer, there are several factors you should examine. First, you should consider your age and the age of your spouse when the income from your annuity is likely to begin. You must also consider the amount of the investment you are willing to make. Such factors will play a crucial role in the type of annuity you select.
Of all the factors you should examine, it is age that probably will have the greatest impact. The older an investor is, for example, the more income difference there will be between an annuity without refund and one with any of the beneficiary options. For example, should you purchase an annuity when you are 55, the difference in life income created under each option is not that much, because the life expectancy for both men and women at 55 exceeds 25 years. Based on life expectancy and payment rates, the insurance company will likely have to pay out the entire amount of the plan no matter what option the contract contains. Options will have different effects, based on age.
There are many options from which you may choose. Assessing your financial goals and situation is important. Asking yourself questions similar to the ones that follow can prove helpful:
- Who is dependent upon my financial support?
- What is the purpose of my buying an annuity?
- How much money can I open the account with?
- How much money can I invest monthly? Yearly?
- When (based on current considerations and factors) do I plan to take funds out?
- How (based on current considerations and factors) do I plan to take funds out?
Asking yourself such questions can lead you to your best options with an annuity. For example, if you wish to use the annuity to provide income for your spouse someday, then you would consider a plan that does in fact provide for that person. You might consider a joint annuity, a plan called "10 years certain, with refund," or you might decide on taking out single annuities, one for you and one for your spouse.
On the other hand, if you have no dependents, and are over 65, you may decide on a straight-life annuity that pays you the highest income for as long as you live. In this case there would be no need to leave any funds behind. After your death the insurance company would stop all payments. You would receive the highest income possible for the rest of your life, but there would be nothing for beneficiaries.
If you wish to provide for beneficiaries, you should consider annuities "with refund," or "10, 15 (or any number) years certain." Each plan has special features.
"With refund" is a plan that at the death of the policyholder, the unused portion of the premium paid is refunded to the beneficiary in a lump sum. The amount of the payment is calculated by subtracting the amount of income that was paid out from the original premium. After the final payout, the account is closed.
"Ten years certain" is a plan in which income is paid for a minimum of ten years. If the annuity owner dies after receiving only payments for three years, his or her beneficiary would receive the income for another 7 years. The number of years is written into the contract at the time the annuity is bought. Thus, the purchaser can buy an annuity with an option of "ten years certain," "15 years certain," "25 years certain," or whatever he or she wishes.
Joint annuities work in the same way regarding payments. Assuming a ten year certain contract -- if one of the owners dies after receiving payments for three years, the other owner, or beneficiary, will receive payments for the remainder of the contract.
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Swiss Annuities and the Legal Protection of Assets
Switzerland's long tradition of providing privacy and safety to investors is extended to annuities. This is vital to investors who want to ensure that their growing investments are not subject to claims by individuals or governments.
Swiss law ensures that insurance policies, including annuities, cannot be seized by creditors. Moreover, such policies cannot be included in a Swiss bankruptcy procedure. The investor enjoys protection from foreign governments in the matter of bankruptcy as well. An American court may expressly order the seizure of a Swiss annuity account, or its inclusion, in a bankruptcy proceeding, but provided that the account has been structured in the proper way Swiss authorities will not seize it.
Two requirements are essential here. First, a U.S. resident who buys a life insurance policy from a Swiss insurance company must designate his or her spouse or descendants, or a third party if done so irrevocably, as beneficiaries. Second, to avoid suspicion that the policy was bought to circumvent a specific judgment, under Swiss law, the investor must have purchased the policy or designated the beneficiaries not less than six months before any bankruptcy decree or collection process.
The following example illustrates how an investor can protect his annuity. Suppose the investor learns that his creditors intend to seize his assets. He assumes that if this happens a court will order him to repatriate the funds in any insurance policy he owns. He immediately designates his wife or children as beneficiaries. He makes sure that this is an irrevocable designation. If he is then ordered by the court to change the designation of the beneficiary and liquidate the annuity, he will not be able to because the beneficiary designation is irrevocable. The insurance company will not accept his changes.
In the case of bankruptcy, the Swiss insurance law, Article 81, provides that if the owner of an annuity has made a revocable designation of spouse or children as beneficiaries, they would automatically become owners of the annuity and acquire all rights in the case of the original owner declaring bankruptcy. If this were to happen, the original owner must relinquish control of the policy. He therefore loses his right to liquidate and use the money of the fund for any other purpose, including the repatriation of funds. Even a court cannot force him to do so.
It is vital that a Swiss insurance company be notified promptly of the bankruptcy of an annuity holder so that they can note this in their records. This way, even if a court orders the original policyholder to liquidate the annuity, the insurance company will not act on those instructions.
As long as the owner of an annuity or insurance policy designates his spouse or children as beneficiaries, the policy is protected from creditors. It doesn't matter whether his beneficiaries have been designated as revocable or irrevocable. The policyholder can take advantage of this by designating his spouse or children as beneficiaries on a revocable basis, and then, provided there are no threats from creditors, change that designation before the policy expires.
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The Security Provided by Swiss Law
Many offshore islands these days boast of having special laws and regulations that enable investors to create a variety of trusts that supposedly will protect the investor's assets. Unfortunately, since such legislation is not part of the actual governing laws of the country, but something designed to attract foreign money, it becomes clear that such laws are enacted merely to create a phony trust, the purpose of which is to defraud creditors and ignore true legal title. In fact, most of these trusts are merely used as legal titles to assets that are left in the U.S. Since the assets remain in the U.S. in brokerage accounts or similar institutions, it is relatively simple for American courts to seize them by declaring the so-called offshore trust a sham. In such a case, the foreign law is irrelevant, as the U.S. court uses the law of the state it is located in to determine the issue.
Swiss law governing the financial industry, however, is a part of the country's legal tradition. The laws were not enacted to provide some type of "underhanded" asset protection, but grew out of Switzerland's history and customs. Swiss annuities are not protected by Swiss courts so that investors might use them to ignore creditors, but rather they have been written for the Swiss people.
The Swiss have always supported the idea of wealth building. Annuities are just another means to that end.
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Maintaining a "Bank Account" with a Swiss Insurance Company
There are many ways to finance the various annuities you may purchase through Swiss insurance companies. Many investors simply make single deposits as necessary, while others decide to use the cost-averaging method.
While some others make their payments through Swiss bank accounts, this isn't necessary. Many prudent investors feel that paying through a Swiss bank account eliminates one of the major advantages of Swiss insurance and that is privacy. Maintaining a Swiss bank account is reportable under U.S. laws.
A premium deposit account is an alternative. A premium deposit account is an interest bearing "bank" account that you open at your insurance company. These accounts offer several important and special features.
A premium deposit account is not reportable to tax authorities because deposits are made to an insurance company and not a bank. Premium deposit accounts also pay interest rates about a percent higher than the typical savings accounts that banks offer. In addition, you pay no withholding tax on interest and all payments are tax free.
There are no restrictions on how much you can deposit in a premium deposit account, although the minimum deposit is SFr100. To open the account, you just send the funds to your insurance company, and instruct them that you want to obtain a premium deposit account. You would use your policy number in the same way you would use a bank account number. You will receive an annual statement summarizing your account.
It is advisable, although certainly not required, that you make annual payments from your premium deposit account. Swiss insurance companies make surcharges of 2%, 3%, and 5% for semi-annual, quarterly, and monthly premium payments respectively. By making an annual payment and using your premium deposit account for small deposits throughout the year, you reduce the amount of surcharges. You can also save by making deposits when the exchange rate is most favorable.
There are some limitations to premium deposit accounts, however. You cannot purchase gold, securities, or other investment products from a premium deposit account. It can be used only as an interest-bearing Swiss franc account from which you can authorize the making of automatic premium payments. When the premium on an annuity is due, the insurance company merely deducts the payment from your account.
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Utilizing the Services of a Swiss Investment Consultant
Although international investors can handle their investments in Switzerland themselves, by far the most practical way to enter the Swiss financial markets and the opportunities they offer is to send a letter to a Swiss insurance broker who specializes in foreign business. He can provide you with all the information you need to make the investment choices that are right for you.
Few transactions can be concluded directly by foreigners either with a Swiss insurance company or with Swiss insurance agents. Legally, they can handle the business, but foreign investors aren't their usual clientele.
It is recommended that you contact JML Swiss Investment Counsellors. JML is an independent group of financial advisors. They have a wealth of experience that they can share with their clientele. Since 1974 they have specialized in Swiss franc insurance, gold, and selected Swiss bank-managed investments for European and overseas investors. Currently the group services over 20,000 clients throughout the world with investments through JML of more than 3.5 billion francs.
JML charges you no fee, because they are paid by the companies with which you invest your money. Their commissions and fees are standard for the financial industry, and all transactions are strictly regulated by the Swiss authorities.
You will find JML easy to work with. Their staff is fluent in English, and they understand the special concerns of the international investor. They are knowledgeable and are aware of the details that are crucial to you as a foreign investor. They will be able to answer your questions about investments, potential taxes and legalities.
- JML Jurg M. Lattmann AG
- Swiss Investment Counsellors
- Germaniastrasse 55, Dept. 212
- CH-8033 Zurich, Switzerland
When you contact JML, be sure to include the following information:
- Your Name
- Telephone Number
- Date of Birth
- Marital Status
- Number of Children and their Ages
- Name of Spouse
Also include a clear explanation of your financial objectives and whether the information is for a corporation or individual or both. You might also wish to include the possible dollar amount that you would be interested in investing.
Without question, Swiss banks are among the safest in the world. When you factor in the variety of services they offer, it is easy to see why they are the choice of investors worldwide.
Take a look at JML's Main Services Page and request the information by filling out the form you're interested in.
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