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6 May 20246 minute read

Unit-linked insurance policies: Regulatory and tax aspects of Supreme Court ruling no. 9418/2024

After years of debate, the Italian Supreme Court's order no. 9418 dated 9 April 2024 issued a clear indication regarding the nature of unit-linked insurance policies.

Following the same Supreme Court’s ruling number 3785/2024 from last February, the Court reaffirmed that for unit linked policies to fall under the definition of life insurance policies, they should have a social security purpose. On the contrary, unit linked policies should not be considered as falling under the definition of life insurance contract where there’s a concrete risk of losing the entire capital invested or receiving inadequate compensation because of the poor performance of the stock market in which the premium is invested.

With the most recent order and the previous ruling, the Supreme Court has emphasized that the presence of the “demographic risk” is a crucial factor in qualifying the policy as a life insurance product and not as a pure financial instrument. According to the Supreme Court, with respect to unit linked policies having a social security purpose, the provisions provided for by the Italian Civil Code are applicable (in particular Article 1923, which establishes the unseizability and distrainability of the sums owed by the insurer to the policyholder or beneficiary).

Based on an interpretation of article 2 of the Italian Legislative Decree no. 209/2005 (Code of Private Insurances), which does not find any ground in the wording of the provision, the Supreme Court, with both rulings, has distinguished unit-linked policies into three categories considering the guarantees offered to the policyholders and the beneficiaries:

  • Guaranteed unit-linked policies: They guarantee the beneficiary repayment of the entire premium paid, with the possibility of a minimum return of the premium invested.
  • Partially guaranteed unit-linked policies: They guarantee the beneficiary a partial reimbursement of the premiums paid by the policyholder.
  • Pure unit-linked policies: In this case, the unit linked policy's performance depends solely on the value of the underlying financial parameter at the time of the insured event (leaving the policyholder and the beneficiary bearing the financial risk related to the performance of the assets underlying the policy).

If a policy falls in the first two categories the policy is a life insurance policy, since the insurer undertakes demographic risk. In these cases, if the insured event occurs, the beneficiary will receive the sum assured when the policy was agreed, regardless of the value of the underlying financial instruments at the time the event occurred.

If, on the other hand, the investment risk falls entirely on the policyholder/beneficiary, the policy cannot be qualified as a life insurance contract (with the consequential classification of the same as a financial product).

The position held by the Supreme Court, although – as stated – does not correspond to the wording of article 2 of the Code of Private Insurances and to the EU Court of Justice position on the nature of unit linked policies. They should be considered as life insurance contracts, regardless of the identification of the subject bearing the financial risk connected to the underlying assets of the policy. The Supreme Court’s position aligns with the recent positions expressed by the Italian insurance regulatory authority (IVASS) with the recent consultation document no. 2/2024 on unit linked products, which emphasizes the importance of the demographic risk.

Based on the consultation document (which introduces a level playing field for all the operators of the sector, in particular regarding the type of underlying assets that can be used for unit linked purposes and the concentration limits of investment), all unit linked products that will be entered after the entry into force of the document will have to provide for a liquidation of a benefit (in case of death or of survival of the life assured) depending on the demographic risk. Only for domestic insurance companies (and not for EU companies operating in Italy under the right of establishment or the freedom to provide services regime), will the demographic risk have to be consistent with the features of the product and of the target market. This includes in terms of premium paid, age of the assured and length of the contract, so that the benefit liquidated to the beneficiaries is not less than a consistent percentage of the premium invested, taking into account the insurance needs of the policyholder.

The document consultation will end the next 27 May. It’s expected it will raise questions among operators on its provisions, considering the vagueness and uncertainty of its rules (including those on the demographic risk) and the alleged level of uniformity that it tends to impose on all operators. This is particularly the case for EU insurers, who, so far, have relied on the principle of the “home country authority and control” as regards identifying the types of underlying assets eligible for unit linked purposes.

But the Supreme Court’s considerations expressed in the recent ruling and orders do appear to match the tax treatment applied to life insurance products.

From a tax perspective, indemnities due to heirs as beneficiaries of insurance policies are exempt from inheritance tax, as provided for by Article 12, par. 1, of the Legislative Decree No. 346/90. The exemption is based on the assumption that the sums received by the beneficiaries of the policies as a result of the death of the policyholder do not constitute “inheritance assets,” to the extent they’re not assets owned by the deceased that are transferred to the heirs mortis causa. The event of death, is only the time from which the beneficiary's right becomes effective, according to the civil law scheme of the contratto a favore del terzo (third-party beneficiary contract ex art. 1411 et seq. and 1920 of the Civil Code).

Article 12, par. 1, of the Legislative Decree No. 346/90 does not seem to be affected by the changes introduced by the Delegated Decree concerning the Reform of the Italian Inheritance and Gift Tax still being approved by the Italian government. So the exemption for unit linked insurance policies from inheritance and gift tax should remain in force.