Offshore investing: Choosing between life insurance bonds and sinking funds

Offshore endowments remain a popular solution for South African investors seeking the benefits of international diversification, tax efficiency and structured long-term planning. Yet one key consideration often requires deeper analysis: whether the endowment should include an insured life, forming a life insurance bond, or whether it should function as a sinking fund, also known in several jurisdictions as a capital redemption bond (CRB). Understanding the distinctions between these structures are essential for identifying the most appropriate solution for each client. Hannes Esterhuyse and Marius Cilliers both Regional Managers at Momentum Wealth International go into more detail.

Understanding the sinking fund structure

The concept of a sinking fund dates to the early 1700s, when governments used dedicated savings plans to repay national debts. Today, the term has a broader application and refers to a structured investment designed to meet a future objective. Under South Africa’s Long-term Insurance Act, a sinking fund policy is defined as a contract that provides one or more sums of money on a fixed or determinable future date, critically, without an insured life attached.

A typical CRB carries a 99-year lifespan, enabling seamless transfer of ownership across generations or between entities. This extended term is necessary because many jurisdictions prohibit investment products without a determinable end date.

While many offshore endowments distinguish between the owner and the insured life, these roles can overlap. In some cases, the insured life has no ownership rights, yet the maturity of the endowment is linked to that person’s death. A sinking fund differs precisely because it removes this dependency on a life event. As a result, the absence of an insured life gives rise to notable advantages.

Sinking funds do not automatically require liquidation upon the death of an individual, making them ideally suited to long-term planning needs. Legal entities can make use of sinking funds without considering the impact of a natural person’s death. In South Africa, they offer legitimate tax deferral opportunities under the Five Funds tax dispensation, as death does not automatically trigger liquidation. They also offer simpler ownership transfer mechanics than an endowment that includes an
insured life, and they are especially well-suited to planning techniques such as
asset-swap structures.

The role of the life insurance bond

Endowments with an insured life, commonly referred to as life insurance bonds in the international context, bring their own set of strategic advantages. Advisers can use them to build intergenerational planning structures, especially when multiple insured lives from different generations are included. These products also offer creditor protection under the Long-term Insurance Act, often making them a safer planning tool for clients concerned about personal liability.

Life insurance bonds can provide cost efficiencies when compared to setting up and maintaining an offshore trust. They further enable strategic liquidity planning through beneficiary nominations, which can be crucial for providing cash to a surviving spouse or dependants. Some providers also allow advisers to choose between succession of ownership and beneficiary payout structures, offering greater flexibility. In contrast, sinking funds generally only provide for successor nominations.

The decision between transferring ownership or paying out proceeds typically rests on whether the beneficiary should gain immediate access to money. Ownership transfer is often preferred when tax deferral, such as postponing capital gains tax, is required, when advisers wish to avoid liquidations during declining market cycles, or when dealing with fixed-term instruments that are best left to mature.

Shared advantages across both structures

Despite their structural differences, sinking funds and life insurance bonds share several important advantages. Many offshore providers today make use of multi-policy arrangements with sub-policies, improving liquidity and enabling partial withdrawals. Some endowments, depending on the provider, also allow Joint-and-Survivor ownership, a mechanism rooted in English law, where surviving owners automatically assume full ownership without the need for estate administration.

Both structures offer similarly streamlined tax administration. The life company accounts for and pays the tax, simplifying the tax burden on the investor. Some clients question whether these products should still be viewed as offshore investments when aspects of the structure fall under South African legislation. The answer lies in the permitted ‘branch model’, which allows offshore endowments to remain fully compliant while still being treated as offshore assets, even if certain administrative consequences fall under South African law.

Both sinking funds and life insurance bonds allow advisers to avoid executor’s fees through beneficiary nominations, although the value of the endowment may still form part of the deceased’s estate for estate duty purposes under section 3 of the Estate Duty Act. They can also help mitigate exposure to offshore situs tax, and, when used correctly, they can eliminate the need for a separate offshore will.

Choosing the most suitable structure for each client

As with most financial planning decisions, there is no universally ‘better’ choice between a sinking fund and a life insurance bond. Each structure has unique features that align with different planning objectives, client profiles, and long-term strategies. The key lies in understanding these nuances and applying them in a client-centric manner.

With the support of Momentum Wealth International’s specialists, financial advisers can confidently guide clients toward the solution best aligned with their circumstances and goals. To learn more about how these solutions can integrate seamlessly into your business and enhance your advice process, speak to your Momentum consultant or visit our website.

Momentum Wealth International Limited is licensed by the Guernsey Financial Services Commission to conduct Investment Business. Momentum Wealth International Limited is an authorised Financial Services Provider pursuant to the Financial Advisory and Intermediary Services Act No. 37 of 2002 in South Africa.