Revisiting Our Old Friend, The Classic Swiss Annuity

There was a time not long ago – a time before European sovereign debt issues, a time before low interest rates, and a time before you felt like a criminal for even considering investing outside of the US – where the classic fixed Swiss annuity was an excellent choice for US investors looking to get funds out of the US and into a currency other than the US dollar. A near 40-year history of a weakening US dollar made the annuity, particularly one denominated in the Swiss franc which performed very well against, particularly attractive.

However, the fixed Swiss annuity lost its luster as other alternatives came to the forefront (think gold) that could easily outpace the nominal interest offered and still offer the same protection from the weakening dollar. It didn’t help either that Switzerland was cast in a negative light thanks to UBS, the Swiss National Bank reacting to a strong CHF, and the fact that Romney was outed as having a Swiss account.

But I’m not writing an obituary today.

I’m writing today to remind you that the classic fixed Swiss annuity is still alive and kicking today, and it lives on for the very same reasons it has for years: asset protection, a lower-premium access to investing outside of the US in a currency other than the US dollar, the safety of the Swiss insurance industry and Switzerland in general, any-time liquidity and inheritance, just to name but a few.

For the uninitiated, the classic fixed Swiss annuity is a straightforward structure. The investor completes an application with a policyholder, insured(s), and beneficiary(ies) in the event of death of the insured. The insurance company, upon receipt of the premium, invests the funds in a manner to ensure the annual gross guaranteed interest rate is provided, plus the possibility of non-guaranteed share of profit. It is possible to denominate a policy in a currency other than the US dollar; it is the policy currency under which the premium is invested.

So why should the classic fixed Swiss annuity still remain a consideration for capital preservation and wealth planning?

The reasons are many…

First, the assets you invest in a Swiss annuity are protected from creditors, a protection that has existed for more than 100 years under Swiss life insurance laws. Swiss law goes on to an additional layer of protection when the purchaser’s spouse, children, or living heirs are listed as beneficiaries in case of death. A person owning a fixed annuity is protected from frivolous lawsuits and legal action from outside sources. Thus, the wealth contained in your annuity cannot be touched by anyone other than the policyholder.

For years, the assumption existed that if you are going to invest in a Swiss annuity, you automatically needed to be invested in the Swiss franc. In fact, many didn’t even know there were every other currency options. While it is completely true that Swiss franc-denominated annuities have performed very well thanks to over 40 years of a weakening US dollar, the fact is that it is possible to invest in other currencies through a policy as well. Other currencies have had success vs. the USD. How about the Norwegian kroner, the Canadian dollar, or the Australian dollar? And, it is possible to switch currencies of a policy at any time.

Then, at a time when banks continue to discontinue their services to Americans, and the banks that remain often times require minimums of $1M or more to even open an account, it is possible to access a classic fixed Swiss annuity for a single premium minimum of $50,000. This low premium means you don’t have to be an ultra-high net worth individual in order to access the world of international investing. When it comes to adding funds, while add-ons are not usually possible, subsequent policies can be purchased for an even lower minimum.

Switzerland, unlike other countries, still holds a dubious record for not having the experiences of defaulting life insurance companies like many other countries have. Because of rigid regulations and supervision set forth by Switzerland’s financial authority, FINMA, age-old laws and conservatism rule in an industry that has seen nary a default in 150 years. And, this supervisory authority helps prevent disreputable insurance companies from catching a foothold, meaning an insurance company is not in business unless they can adhere.

Then, as an investment jurisdiction, it is important to remember that we have a direct democracy in Switzerland where we vote every 3 months on a wide variety of federal and local issues. Have you ever wondered why the Swiss aren’t part of the EU? It has to do with a public that refused to allow their country into that group. If a Swiss government were to show any sign of financial confiscation or repression, you could count on the fact people would have something to say about it.

On the fixed annuity itself, there are no surrender fees or penalties for closing a policy at any time. Should an unforeseen family emergency arise, or should the children need help in going to college or buying a home, it is possible to withdraw funds from the policy, partially or wholly, at any time during the deferral period of the policy. Even during the annuitization period of the policy, it is possible to surrender the policy fully and get back any of the remaining funds, minus of course any annuity payments that have already been made.

Finally, with a fixed Swiss annuity, it is possible to list implicitly who, or what, should be the beneficiary of the death benefit in case of the death of the insured. With this designation, the death benefit is paid directly to that/those beneficiaries, thus bypassing any probate. It is possible to name individuals, trusts, etc. It doesn’t matter if the policy is in the deferral or annuity phase; there will be a benefit to be paid to the beneficiary.

It is also worth mentioning that a classic fixed Swiss annuity has a lot of flexibility you might not be used to with domestic annuities. For example, you can lengthen or shorten the deferral period of a policy at any time, without cost, until the insured person reaches the age of 80. Policyholders and beneficiaries can be changed at any time. And lifetime or fixed-term annuity payments are possible.

Then there’s PPLI

Before wrapping up any conversation on fixed Swiss annuities, one should also be aware of the variable annuity options that are possible, often times referred to under the title of PPLI, or private placement life insurance. The deferred variable annuity actually combines the best of both worlds – a managed bank account and insurance – all under a safe offshore jurisdiction.

In as simplest terms possible, the variable annuity is a vehicle that, when structured correctly, can give the US investor unlimited access to international investments all while knowing they have a policy that is compliant according to US rules. The annuity serves as the ‘Christmas wrapping’ around the managed bank account, or the ‘present’, if you will. This structure allows the investor to direct the international investments used, including currencies, securities, and even physically stored precious metals.

The deferred variable annuity offers many of the same benefits of the fixed annuity, but takes it a step further with more investment flexibility, additional jurisdictional diversification and safety, possible tax-deferability, and a much higher potential return based on the performance of the underlying investments.

Conclusion

In closing, one can certainly try to argue that the classic fixed Swiss annuity is down and out as a viable investment option. But the fact remains that they still are alive and well. No one will ever say you should put all of your assets into a fixed annuity, but you will be hard pressed to find a solution that provides as much safety, asset protection and flexibility. A good piece to a well-rounded portfolio puzzle: the classic fixed Swiss annuity.

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