Safe or Not? Why Does “Insurance Trust” Become a New Instrument Favored by the Rich?

Safe or Not? Why Does “Insurance Trust” Become a New Instrument Favored by the Rich?

Insurance trust is drawing attention from high net-worth individuals.

The so-called insurance trust means that while signing an insurance contract with an insurance company, the insured signs another trust contract with a trust institution at the same time. Therefore, when the claims conditions come into existence, the insurance company will deliver the insurance compensation to the trust institution, which will open a special trust account for the beneficiary, manage and use such trust property in accordance with the trust contract, and deliver the benefits of trust to the beneficiary upon the expiration of the trust.

Such combination of “insurance + trust” originates from Britain and flourishes in the U.S. In 2001, life insurance trust firstly appeared in Taiwan, China. In 2014, insurance trust was introduced to mainland China as CITIC Trust and CITIC Prudential jointly launched the first insurance trust in China.

In developed countries, 80%-90% high net-worth individuals pass on their wealth to later generations by insurance trust or foundation. As an effective instrument for family wealth management and heritage allocation, it has been widespread and mature. Compared with other modes of wealth inheritance, what advantages make the insurance trust favored by numerous family enterprises and high net-worth individuals?

  1. Safe asset isolation

Determined by the independence of trust property, once a trust is set up, the trust property will be independent from properties and other trust properties of the trustee. It means that even if the settlor is confronted with bankruptcy liquidation, the court does not have the authority to claim for mandatory recovery against the trust properties.

Besides, it's worth noting that, since the settlor may appoint beneficiaries and scope of benefit of insurance trust, divorce will not pose an impact on the full inheritance of wealth.

  1. II. “Customized” wealth inheritance

Compared with insurance, insurance trust is more individual. The settlor and the trustee may flexibly reach agreements on beneficiary, trust purpose, disposal of assets, conditions and methods of benefit allocation, term, and other clauses in the trust agreement based on actual demands.

For example, the insured may specify the conditions for the beneficiary to gain benefits from the trust, such as “the beneficiary is at least 18 years old”, “the beneficiary is married”, and “after the birth of the beneficiary’s child”. The trustee may also make arrangement for the allocation of trust assets in case of emergencies, such as the decease or divorce of, or litigation against the settlor or beneficiary. If the insured divides his/her properties while setting up insurance trust, the risk caused by his/her marital status can be fully avoided.

  1. Low investment threshold and a wide range of target customers

In general, trust companies don’t accept family trust worth less than 3 million Yuan. Therefore, family trust is classified into standard family trust, worth at least 3 million to 6 million Yuan, and customized family trust, worth more than 30 million Yuan. Such a high capital threshold scares off a great number of families.

However, for insurance trust in which there exists leverage between the insurance premium and sum insured, if the sum insured reaches 3 million Yuan, it reaches the threshold for a family trust. It lowers the threshold for a family trust in a disguised form.

Besides the three unique advantages above-mentioned, the functions of an insurance trust to "avoid taxes and preserve and increase value" and to "keep information strictly confidential" also make it popular among rich people.

Insurance trust draws increasing attention from rich people and gradually expands its business scale day by day, but as a newborn thing in China, it is still faced with a number of challenges.

First of all, there are no provisions on market access and specific operation mode in the Insurance Law, the Trust Law or any other legal document. No corresponding regulator is defined. Supervision rules are not enough.

Secondly, compared with more than 100 years of development of insurance trust in Europe and America, trust companies in China lack professional investment management capabilities. At present, trust companies in China mainly rely on financing operations. Investors have no sufficient confidence on the management of insurance benefits provided by trust companies to preserve and increase the value.

Thirdly, the leverage of insurance policy in China is low. Compared to detached family trust, therefore, it has no obvious advantages for high net worth customers in terms of wealth management.

In a word, benefits of the combination of “insurance + trust” significantly outstrip that of pure insurance. However, investors have to analyze their specific circumstances, weight the advantages and disadvantages, and make a reasonable choice correspondingly.

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