Life insurance enjoys uniquely preferential treatment under U.S. tax law:
- All earnings accumulate free of taxes until withdrawal;
- The death benefit can pass to beneficiaries tax-free;
- Tax-free loans are possible;
- Tax-free exchanges are possible; and
- With proper structuring, the proceeds can flow to beneficiaries free of both estate and generation-skipping taxes.
Only life insurance can claim these five advantages. Essentially, you avoid the impact of tax on portfolio income and transactions (depending on portfolio turnover, anywhere from 20% to 50% of the annual pre-tax returns) in exchange for the cost of insurance; approximately 1-3% per year.
The most flexible policies are variable universal life insurance (VUL) policies. Instead of a cash value guaranteed by the insurance company, there a separate account that may consist of may consist of a securities portfolio. The value of the account is determined by the performance of investments within it.
VUL policies are available in the United States. However, VUL policies written by non-U.S. companies offer a number of advantages in comparison with U.S. companies:
- Enhanced asset protection;
- Greater privacy;
- Tax-deferred access to offshore securities markets;
- Potential avoidance of foreign exchange controls; and
- Lower taxes, regulatory costs, and distribution costs
Another advantage of dealing with a non-U.S. company is that the world’s largest reinsurers are located outside the United States. Especially for large policies, insurance companies often contract with reinsurers to help pay death benefits upon the death of the insured person.
The most innovative offshore life insurance products are known as "private placement variable universal life" (PPVUL) policies. It may be possible for the investment manager of the PPVUL policy to place a portion of the underlying account values not only in a portfolio of foreign securities, but also in a foreign corporation or other entity that operates an ongoing international business, with all profits accumulating free of tax.
Offshore PPVUL policies are worth considering if you’re seeking a flexible, tax-advantaged, and comprehensive estate plan providing tax efficiency and access to a wide selection of international asset management options. Since it requires expert tax advice to set up properly, and requires ongoing maintenance to insure tax compliance, it’s most cost effective if you can invest US$1 million or more in the policy.
I’ll be addressing offshore life insurance policies in one of my presentations at the Sovereign Society’s "Offshore Advantage Academy seminar" November 6-10 in The Bahamas. For more information on this event, just click on the "Offshore Advantage Academy" link on the right side of this page. In the meantime, if you have questions about PPVUL policies, please feel free to contact me at .
Copyright © 2007 by Mark Nestmann
