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BRIEFING CENTER
Offshore Private Placement Variable Universal
Life Insurance
Offshore private placement variable universal life
insurance provides the following advantages to high net worth individuals:
• Tax-free investment growth;
• Tax-free sale of investment assets;
• Invest in anything at all - public securities, hedge funds, private
businesses;
• Access cash tax-free; and
• Income tax-free and estate tax-free payout at death.
Issuer-direct U.S.-tax-qualified offshore variable life insurance policies
(called “private placement” policies) are priced below the cost of comparable
domestic policies. Every policy is custom-drafted for each policyholder,
providing maximum flexibility in terms and conditions. They provide tremendous
tax advantages, investment flexibility and asset protection.
Variable universal life insurance is whole life insurance that allows for
flexible premiums and provides for the cash value of the policy to be invested
in an investment portfolio. A portion of the cash value is used to pay for term
insurance to guarantee a certain minimum death benefit each year. The term
insurance is used to cover the “net amount at risk” which is the difference
between the guaranteed death benefit and the cash value. The term insurance
component is usually kept to the minimum amount necessary to qualify the policy
for income tax purposes. Policy expenses and costs are also paid from the cash
value.
Premiums paid into a variable life insurance policy are held by the insurer in a
separate account for the benefit of the policy owner. The premiums are used to
pay expenses, the cost of term insurance necessary to maintain the contract for
tax purposes and for investment as reserves for the policy.
Income Tax Advantages. In many cases, offshore private placement variable
universal life insurance is the most tax-favored and least expensive tax
strategy available for high net worth individuals. Investment growth inside the
policy is not taxed. Unless the policy is surrendered prior to the death of the
insured, the investment growth within the policy will not be subject to any U.S.
income taxes or capital gains taxes. The cash value of the policy may be
invested and traded. Investment assets may be bought and sold without triggering
current taxes. U.S. taxes need play no role in investment decisions.
The most efficient way to use a variable universal life insurance policy is to
invest as much as possible as soon as possible under the tax laws. This is
usually done by investing seven equal annual premiums in the policy (which can
be squeezed into three to five years). This will maximize the amount which can
be invested in the underlying portfolio, which will qualify for tax deferral and
for tax-free withdrawals by means of loans against the cash value of the policy.
By using a survivorship life insurance policy (i.e., a policy insuring the lives
of more than one person which pays out at the death of the last to die), the
policy can continue to provide tax-free growth and borrowing after the client’s
death.
As explained below, the policy is typically owned by an offshore trust or
offshore LLC. As cash is needed, the trustee of the trust or the manager of the
LLC borrows against the cash value of the policy. The borrowed funds are
distributed income tax-free to the settlor and his spouse, and, if applicable,
to the other beneficiaries. These loans need not be repaid until death (when
they are simply repaid from the death benefit) and bear little or no effective
interest costs. As the investments grow, the policyholder is able to borrow
larger sums tax-free. Offshore private placement variable universal life
insurance is often the best retirement planning vehicle for high net worth
individuals.
The income tax advantage of the policy produces the functional equivalent of a
self-directed retirement account initially funded with after-tax dollars. In
addition, there is the added benefit of paying term life insurance premiums
inside the policy with untaxed dollars. Plus, rather than having any balances
left at death subject to income taxation in your heirs’ hands, the account
balance is passed at death free of income tax as insurance proceeds to heirs or
to a trust for heirs.
By setting aside $100,000 each year for five years, with an average annual net
return of 8%, the funds in the policy will accumulate to $3,000,000 after
another 20 years. This reflects $2,500,000 of untaxed inside build-up above the
cost basis of $500,000. With an unlimited choice of investments, including hedge
funds and funds of hedge funds, you might earn more than 8%. The benefit of the
strategy really shines when you decide to take the money back out of the policy.
Because of the special tax rules Congress has given the life insurance industry,
you could pull out nearly $330,000 a year tax-free for 15 years utilizing a
series of policy withdrawals and loans. Not only does the investment accumulate
tax-free but you are able to withdraw funds tax-free. Increasing the initial
five premiums to $400,000 each produces an accumulation of $11,000,000 after 20
years, which would allow for 15 years of withdrawals at a rate of $1,220,000 per
year.
Estate Taxation. The policies can be estate-tax neutral (included in the
policy owner’s estate) or estate-tax advantaged (excluded from the policy
owner’s estate). If estate tax exclusion is a goal, the use of an irrevocable
life insurance trust funded by outright gifts of cash or by means of a gift
tax-leveraged funding technique can achieve this result. Some of the gift
tax-leveraged funding techniques available include:
• premium loans
• split-dollar funding
• grantor retained annuity trusts
• sale of income producing-assets to the insurance trust
• private annuity
Investment Flexibility. In a traditional variable life insurance setting,
insurance companies contract with investment advisers to manage the separate
account funds. Most insurance companies give policy owners the choice of one to
three dozen funds in which to invest. Although these funds are limited to the
company’s variable policy owners, these funds typically mirror commercially
available mutual funds.
Insurance companies that offer private placement variable life insurance
policies allow the policy owner to name one or more U.S. or foreign investment
advisers to manage the policy’s separate account. The investment adviser then
invests the policy separate account at its discretion.
Offshore life insurance policies offer unlimited investment options using:
• The mutual funds of the issuer;
• Customized investment management by the client’s existing U.S. advisor; or
• Customized investment management by offshore investment advisors, e.g., in
London or Geneva.
Nearly all policyholders choose customized investment management, which allows
investment in:
• U.S. and foreign publicly traded equities and
bonds;
• U.S. and foreign government debt instruments;
• U.S. and foreign hedge funds;
• U.S. and foreign venture capital funds;
• U.S. and foreign privately traded securities;
• Partnership and LLC interests;
• Real estate;
• Patents and trademarks; and
• Just about anything else!.
It is not necessary to keep policy investments assets outside of the U.S. The
policies rely on U.S. tax laws instead of offshore tax chicanery for tax
savings. Therefore, investment assets can be held in the U.S. or outside the
U.S.
Inexpensive and Efficient. Expenses and fees involved with offshore
private placement life insurance are relatively low compared to the tremendous
tax savings. Insurance company fees are usually limited to:
• The cost of insurance to provide sufficient
death benefit so that the policy qualifies under U.S. tax laws. The cost of
insurance depends on the level of benefit necessary and the age of the insured.
• Insurance company management fees of 1% to 2% annually for policy
administration.
• Investment management fee of 0.5% to 1.5%.
• Policy establishment fees.
Legal fees may be incurred for trust settlement, policy negotiation, etc. State
premium taxes of up to 4% will not be incurred with offshore policies. Only a 1%
federal excise tax (or a 1% deferred acquisition cost tax recovery charge for
U.S.-taxed offshore insurers) on premiums is payable.
Asset Protection Benefits. In addition to being tax-advantaged investment
vehicles, life insurance products can also play a valuable role in asset
protection planning. Life insurance policies are protected under the laws of
most states, and in those states where protection is minimal, the policy can be
structured to provide substantial asset protection for the cash value of the
policy. Because the purchase of a life insurance policy is an exchange for value
(cash for insurance), it is unlikely that the purchase will be a fraudulent
transfer; thus a creditor should not be able to “undo” the purchase.
Furthermore, because private placement policies are custom-drafted, they can be
designed to maximize asset protection features. Finally, offshore life insurance
products can be wrapped in additional asset protected layers to provide
additional creditor deterrence and settlement leverage.
Structure of Transaction. U.S. securities law and state insurance laws
allow U.S. persons to purchase foreign insurance policies, but potentially can
penalize foreign companies that actively market and sell insurance policies to
U.S. persons. Therefore, offshore policies typically are purchased using foreign
trusts or foreign companies.
Using a foreign trust or company structure has the added advantage of providing
additional asset protection as well as providing estate planning opportunities
that would not be available with a direct purchase.
Sample Costs in an
Offshore Private Placement Variable Universal Life Insurance Structure
|
|
$500,000 to $2MM in total committed premiums
($100,000 to $400,000 per year for 5 years) |
Over $2MM in total committed premiums (Over
$400,000 per year for 5 years) |
|
Initial insurance company charge applied
against initial premiums |
3.5% ($17,500 to $70,000) |
N/A |
|
Policy Administration Fee |
N/A |
0.25% annually |
|
Mortality & Expense Charge |
1.25% annually (includes M& E charges and all
administrative charges) |
0.75% annually |
|
Cost of Insurance |
Varies with insured’s age and health and with
the net amount at risk |
Varies with insured’s age and health and with
the net amount at risk |
|
Federal Deferred Acquisition Cost Tax Charge |
N/A |
1% of premiums ($20,000+) |
|
Federal Excise Tax |
1% ($5,000 to $20,000) |
N/A |
|
Investment Manager Fees |
Varies according to client’s choice of
individual investment managers |
Varies according to client’s choice of
individual investment managers |
|
Client’s Professional Fees (Legal, Accounting,
Consulting) paid up front |
$25,000 |
$80,000 |
This information
is provided for general educational purposes only, and does not constitute and
should not be construed as an
offer to sell any insurance product or security or other investment. This
information does not constitute and should not be construed as an advertisement or
solicitation by Riser Adkisson LLP or any person to arrange or assist in
arranging the purchase of or investment in any insurance or financial product.
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