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Foreign Insurance and Annuities

International insurance policy

What You Should Know About Foreign Insurance And Annuities

Foreign insurance products (including annuities) appeal to people for a variety of reasons. First, the payout currency could be something other than U.S. dollars.

So, if you are looking for a hedge against the dollar, foreign insurance products can be just the right type of insurance for you. Additionally, insurance in the United States is regulated by both the federal government (with regard to tax matters) and the state (with regard to the investments allowable within an insurance wrapper).

If you buy foreign insurance, it must still be compatible with the federal rules with regard to the ratio between premium and death benefit as well as the minimum diversification within the policy. However, if you observe those rules correctly, then you achieve U.S. tax deferral on the build-up of the growth.

Because it is offshore, there are no state rules to observe as to the type or quality of the underlying investments. So, whereas the state of New York may limit insurance policy investment to 20 or so mutual funds, a policy issued offshore may permit virtually any type of public or private investment for the funds within the policy.

Popular annuities include Swiss franc annuities, foreign currency baskets, and variable annuities with virtually any type of global investments inside them.

Such annuity and insurance products can offer asset protection as well as currency and investment diversification away from the dollar and standard U.S. investment vehicles.For folks who want direct exposure to global investment on a diversified nondollar-denominated and tax-deferred basis, foreign insurance and investment products meet the need.

Offshore Life Insurance

A customized offshore variable life insurance policy is one of the most tax-efficient and -flexible investment vehicles available in the marketplace today. It is an appropriate planning tool, however, only for high-net-worth individuals looking for asset protection, income tax savings, and estate tax avoidance.

Before we try to explain how all that works and help you consider whether this might be a tax- and estate-planning vehicle of value for you, let’s review some life insurance fundamentals.

You buy life insurance for two reasons. The first is the death benefit. You can use those funds to create or protect an estate. This type of life insurance comes in the form of temporary or permanent term insurance. With term insurance you simply pay for the underlying life insurance; there’s no investment element.

The second reason to buy life insurance is for wealth accumulation through tax-deferred growth, tax-free cash flow, and an income tax-free death benefit.

With traditional term life insurance, the objective is to purchase death benefit protection for the least amount of premium dollars paid to the insurance company. A term life policy never has a cash value. You create a cash value through a policy into which you pay in more than the cost of the death benefit. With a traditional variable life insurance policy, you build up cash value over time, with the extra cash invested by the insurance company.

With offshore variable life insurance, you can immediately invest large amounts of assets. The goal is to deposit as much cash or assets into the policy while maintaining the minimum policy face amount or death benefit required by the IRS under Section 7702. Funding the policy this way minimizes the cost of insurance while maximizing the overall investment return on the assets in the policy.

Working with a team of advisors who are experts in the design and structure of this kind of policy is paramount.

To maintain all the tax-free characteristics of life insurance, you must maintain a minimum threshold of life insurance for the amount of premiums paid. If the policy is viewed as a MEC (Modified Endowment Contract), then the IRS will consider it as an investment and withdrawals will be taxed at ordinary income levels and with a potential penalty. You want to be sure that your advisors understand how to structure things to retain non-MEC status, allowing for distributions of cash value in a tax-efficient manner.

Offshore life insurance does not require a formal securities registration. This allows the insurance carrier to customize the investment options within the policy to meet the needs of the investor. This is more expensive for the carrier, so these kinds of policies are typically offered only to qualified purchasers seeking to invest large sums of money (often more than US$1 million) in the policy.

Estate Planning Upsides

Properly structured, an offshore variable life insurance policy (or, as it’s commonly referred to, an offshore insurance wrapper) has many advantages for estate planning. Your investments can grow taxfree, and you can take tax-free distributions up to the amount of the premiums paid into the policy.

Life insurance products are handled on a first-in, first-out (FIFO) basis. So initial withdrawals are treated as if they come from the first source of the funds, and a return of basis is not a taxable gain. You’re able to borrow against the policy without recognizing a taxable distribution. This provides access to funds without tax consequences.

Further, if the insured is not the policyholder, then the death benefits paid out by the policy are not subject to estate tax.

Offshore variable life insurance also offers great flexibility with regards to types of investments and asset diversification options available. You have complete access to global investments and investment managers. In fact, the type of investments that can be held in the segregated account is unlimited (as long as the assets can be properly valued). These asset options could include:

  • Real estate
  • Hedge funds
  • Various worldwide currencies
  • Closely held companies
  • Stock portfolios
  • Precious metals
  • Collectibles
  • Patents and trademarks

It’s important to note that the policy owner is prohibited from exercising control over the selection of securities. Investment managers appointed by the insurance company must assist the policyholder in managing the funds in the separate segregated account. This, therefore, is a very important consideration when choosing an insurance carrier to work with. You want to be comfortable with the investment managers you’ll be working with.

Protection And Privacy

Asset protection and privacy are other benefits of offshore life insurance. The funds or assets established in the separate account of the insurance company are generally not exposed to creditors’ claims. These policies possess all of the creditor protection included with onshore life insurance and more. Further, you can make one of these policies even more private by placing it in a foreign trust, giving it the additional protection granted by that trust’s governing jurisdiction.

Insurance companies operating outside the United States often have lower overhead costs than their U.S. counterparts. U.S insurance companies have expensive distribution systems, pay commission to agents, and are subject to costly government regulation, such as state premium taxes and the Federal Deferred Acquisition Cost (DAC) assessed on domestic policy premiums. As a result, foreign carriers enjoy reduced premium charges and lower internal operating costs. These reduced charges and costs are generally passed on to policyholders. Foreign carriers offer other advantages, as well, including policies with larger face values and the option for premium payments, withdrawals, loans, and death benefits to be made in different currencies.

It’s important to understand the diversification requirements for the underlying separate segregated account. These must be maintained for the life insurance policy to continue to qualify as a life insurance policy.

The contract is treated as a life insurance for U.S. income tax purposes if it is based on a segregated asset account. This account is divided into investment accounts. No more than 55% of the value of a separate segregated account can be placed in any one investment; no more than 70% of the value of a separate segregated account can be placed in any two investments; no more than 80% of the value of a separate segregated account can be placed in any three investments; and no more than 90% of the value of a separate segregated account can be placed in any four investments. The appointed investment manager will manage and assist in meeting these requirements on a quarterly and annual basis.

Life insurance policies issued to a citizen or resident of the United States as the insured have an excise tax of 1% due on each premium payment made to a foreign life insurance company. The excise tax can be paid by the foreign insurance carrier on behalf of the policy owner, without disclosing the identity of the owner, to maintain client confidentiality.

Does An Offshore Life Insurance Policy Make Sense For You?

As we mentioned above, a customized offshore variable life insurance policy is one of the most tax-efficient and -flexible investment vehicles available in the marketplace today. However, it is appropriate only for a very limited portion of the population. Ideal candidates are high-net-worth individuals seeking tax-efficient vehicles as part of a comprehensive global wealth and investment plan. These investors must qualify for life insurance through underwriting, be willing to commit large premiums, and have a net worth of US$3 to 5 million or more.

Also, if you’re an American, you must remember that offshore insurance cannot be negotiated, solicited, underwritten, or placed within the United States. The process must be initiated and managed from start to finish outside the United States. Therefore, Americans with an interest in customized offshore variable life insurance must contact and arrange to meet a representative of an offshore carrier outside U.S. borders.