Cross-Channel savings on your insurance

British citizens can now shop for policies on the Continent. While not duty free, there are tax advantages, writes David Evans

For the last two years, a UK citizen has been able not only to fill the boot of his car with wine and beer when returning from the Continent, but also to purchase a life assurance policy from a foreign insurance company, provided the company is based within another EU country.

On 1 July 1994, a piece of European legislation from Brussels known as the 3rd Life Directive made it possible for European Union insurance companies to market their wares cross border into other EU member states.

But why would this have any appeal to a UK resident? Why would UK residents think of buying an insurance policy from, say, Germany or Italy? Surely, such an insurance policy would be issued in a language which they do not understand fluently, be covered by foreign contract law and they would be asked to pay the premiums and have the insurance cover in a foreign currency.

There would obviously need to be some very powerful reasons, with some very clear extra benefits before anyone would begin to consider a European policy alternative, wouldn't there?

Well, maybe UK citizens need to look a little closer at Europe, especially if they are about to purchase a whole-of-life insurance policy covering them for either death benefits or critical illness cover. In some cases, the European life insurance company may well be able to offer the same level of cover, but at a significantly lower premium.

The key to lower charges is the different way life assurance company funds are taxed across the EU. The UK approach to the taxation of life assurance funds is different from almost all the rest of Europe. Of course, until July 1994 this was of academic interest only, because prior to this date UK residents were simply not allowed to buy European insurance policies.

But that has all changed, so perhaps it will be worth our while (and benefit our pockets) to look a little closer at the European factor and its effect on some of our life assurance needs.

So, what's different about the taxation of UK insurance companies and why should this have such a dramatic effect on insurance premiums? In the UK, the income from life assurance company funds is taxed at source, unlike the European companies where the same funds pay virtually no tax themselves. In Europe, it is left to the individual policyholder to settle up with the tax authorities, but even then, only when the policy pays out.

In other words, the tax bill is not avoided, but it is certainly deferred, possibly many years into the future. And a tax deferred is usually a tax saved.

The UK tax rules relating to the individual policy for those with European policies is exactly the same, so a UK resident would also be expected to pay tax to the UK authorities on his European life assurance policy when it pays out.

However, it should be noted that the only tax liability is based on the investment profits in the policy, if there were any, and most definitely not on the actual insurance pay-out. This basic but very important element of arbitrage means that until the UK tax authorities follow the European model, UK life assurance companies are at a significant disadvantage when it comes to offering certain types of insurance policies.

Indeed, in certain cases, the European whole-of-life policy has proved to be as much as 25 per cent cheaper than its equivalent UK competitor. The indicators are clear: while we may buy our cars from Germany and wine from France, we should now be looking very carefully at whether we should not be buying life assurance from, perhaps, Dublin or Luxembourg.

Finally, the good news goes beyond just premium savings, because since July 1994 it has also been possible to buy European protection products which are issued under UK contract law, where the marketing material and policy documents are issued in English and the premiums and benefits are denominated in sterling, and the products themselves are regulated by the Personal Investment Authority, the UK financial services regulator.

Perhaps the tax structure for UK life companies will change, but until it does, UK citizens should not halt the selection process for insurance products at the white cliffs of Dover. Just think, if we can save up to 25 per cent on the premiums for our whole-of-life policy, there will be more to spend in the duty-free shop when we go on holiday to Europe this summer.

David Evans is UK sales director of Scottish Amicable European in Dublin