Regulation is a vital aspect for investors who are exploring the topic of digital assets – which, as a new asset class, is a disruption to traditional finance. So how can you tie in an investment as disruptive as digital assets with something as traditional as life insurance contracts? Our view is that they can harmonise unexpectedly, in a balance of risk and regulation.

Using life insurance contracts to diversify a portfolio

Digital assets are highly volatile and require a good risk diversified portfolio. Life insurance products, such as universal life insurance, on the other hand, provide cash value guarantees and steady interest returns. Therefore, life insurance may be used as a guaranteed asset class to balance risk in a portfolio in case of a bulk position in digital assets. But there is more.

Adding digital assets to life insurance contracts

Holding digital assets may create complexity around legal ownership, reporting, taxation, succession etc. But did you know that digital assets can be purchased directly or be added as premium to life insurance products with open custody and investment architectures such as unit-linked insurance (also known as Private Placement Life Insurance or “PPLI”).

Exposure to digital assets can be achieved via PPLI products in the following ways:

• As regulated structures (e.g. funds, investment trusts, structured products)
• Within SPV (special purpose vehicles: legal entities designed for a clearly defined and limited purpose) created ad hoc to hold digital assets
• As a direct holding (with selected providers and according to restrictions).

Depending on your jurisdiction, life insurance may then provide capital guarantees and optimise holding, reporting, taxation and succession planning.

Insurance regulations across jurisdictions

Comprehensive advice by regulators may not yet be available to those looking at digital assets as an eligible investment within life insurance contracts. However, it is possible to make reference to general insurance regulations that are provided by sovereign authorities, as well as from the insurance supervisory authorities in selected jurisdictions. Where can investors start to find guidance?

Let’s take, for example, the Solvency II Rulebook – this is the EU’s guide for insurance and reinsurance undertakings. Within its section ’Prudent Person Principle’ (or PPP), we see the drivers of investments of European insurances. This provides guidelines and leaves member states with the option to add detailed parameters.

The section states, among other things, that a life insurance “shall only invest in assets and instruments whose risks the undertaking concerned can properly identify, measure, monitor, manage, control and report” and “investment and assets which are not admitted to trading on a regulated financial market shall be kept to prudent levels”.

How would digital assets investments tie into this? ‘Direct investments’ in crypto coins fall into the definition of unregulated assets and, as result of this, it is an asset class to keep at prudent level.

European and US Regulators have been historically sceptical about crypto coins, making clear that this is a speculative asset class, which is not suitable for retail investors. Adding to confusion for investors, some regulators in EU jurisdictions swing between leaving the rulebook’s guidelines up to interpretation, and adding in additional restrictions.

Will these regulations grow more solid?

Following recent events (driven in particular by FTX Exchange, Terra Luna and Celsius collapses), it seems clear that the regulation around these investments will increase and eventually become more robust. MICA (Markets In Crypto-Assets), for example, is a regulation under EU law. It recently published regulatory information covering unbacked crypto-assets, and so-called “stablecoins” (coins pegged to a commodity, currency, or other asset), as well as the trading venues and the wallets where these assets are held.

Also, in the US, the Securities and Exchange Commission (SEC) has recently approved 11 BTC Spot ETFs. These are defined as exchange-traded funds that track the prices of bitcoin. This regulatory framework shall protect investors and preserve financial stability, while potentially allowing innovation and fostering the attractiveness of the digital asset sector.

Benefits of adding digital assets to a life insurance contract

Below, we aim to explore the differing aspects to consider when directly investing in digital assets, versus possibly combining them with life insurance contracts.

The benefits of holding digital assets within a life insurance contract may change based on the insurance company’s issuing jurisdiction and on the domicile of the policyholder.

For the reasons outlined above, investors should consider all possible options if they are interested in entering the digital assets space, particularly in terms of life insurance. As the environment is ever-changing, seeking the advice of professionals in the space is recommended.

Please note: the information provided is for educational purposes only.