Author: Benjamin S. Terner

Why is this Topic Important to Wealth Managers?   Provides an overview of one useful tool for affluent clients.  Presents offshore private placement life insurance considerations wealth managers may consider when discussing this topic with clients.   

As a brief review, private placement variable universal life insurance may allow individuals “the ability to select asset management beyond the limited asset-management choices offered in retail variable life insurance products.”[1]

Generally speaking, one benefit derived from the use of private placement policies “in the high-net-worth market” is that the policy is essentially an “investment vehicle, optimally used for the most tax-inefficient asset classes in an investor’s portfolio.”  Therefore, some common goals for wealth managers structuring transactions as private placement life contracts: “are to take advantage of the income tax and possible estate tax savings, to maximize investment choices, and to incur as little cost as possible in doing so.”[2]

However, “[b]ecause of the expense associated with regulatory pressures imposed by federal and state securities laws and by state insurance boards, some domestic companies have more limited investment platforms than their offshore counterparts.” [3]  Many jurisdictions have fewer “limitations on investments underlying [private placement] variable life.”  Those products, “allow for a wider selection of international investment options than are available with domestic products.” [4]

Although a number of private placement products are available domestically, “many domestic carriers will agree to engage a policy owner’s pre-selected investment manager only with a premium commitment of $ 20,000,000 or more at a significant out-of-pocket cost to the purchaser.”[5]  However, transactions offshore commonly require lower out-of-pocket expenses and anywhere from $1,000,000 to $ 5,000,000 as a minimum premium, which in essence “offers a cost-efficient alternative to the domestic market.”

Asset Protection Hurdles

Private placement policies are commonly purchased by a trust, “[p]rotecting assets from future creditors, claimants and restitutionees.” [6]  This is because, “United States judgments will often not be recognized in these jurisdictions, creditors and claimants are forced to initiate proceedings in the jurisdiction in which the assets are located.”   Additionally, “many jurisdictions have short statutes of limitation,” [7] and “[l]itigation abroad is expensive and difficult.”  The combination of these factors “sufficiently deter[s] some creditors and claimants from pursuing legal action in foreign jurisdictions. [8]

Tax Treatment

To close, as a general rule life insurance policies are treated, for federal income tax purposes, the same. [9]  Which means generally, “earnings on policy cash values, including dividends, interest and capital gains, are not taxable to the policy owner as they accumulate within the policy . . . .” [10]  The face value of the contract is also afforded similar treatment as domestic policies.  [11] “Finally, if properly constructed, the insured may withdraw and borrow against the policy without realizing taxable income.[12]  Naturally, as with all planning, there are issues to be addressed, in this case to  properly construct the policy.

Tomorrow’s blogticle will discuss more offshore planning considerations.    

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] ALI-ABA Estate Planning Course Materials Journal June 2006. “Private Planning Life Insurance Part I.”  Leslie C. Giordani and Michael H. Ripp, Jr.  http://files.ali-aba.org/thumbs/datastorage/lacidoirep/articles/EPCMJ_EPCMJ0606_giordani_thumb.pdf. Pg 46.   Last Accessed 9/2/12010. 

[2] Id. 

[3] Id.

[4]  Life Insurance and Modified Endowments under Internal Revenue Code Sections 7702 and 7702A.  Desrochers.  http://books.google.com/books?id=X94g1ABbTj0C&pg=PA131&lpg=PA131&dq=benefits+offshore+private+placement+life+insurance+law&source=bl&ots=P3A-Q38C8X&sig=fQVJYGLCLTT0YTQPFeo9QVhZ6VY&hl=en&ei=pDmaTLWiC4WasAO6nfieDA&sa=X&oi=book_result&ct=result&resnum=6&ved=0CCQQ6AEwBTgU#v=onepage&q&f=false.    PG 132.  2004.  Last Accessed 9/21/2010. 

[5] 9 Conn. Ins. L.J. 613, 621. Richard Lewis. (2002/2003) citing, Leslie C. Giordani, Foreign Life Insurance Strategies, in 2 Int’l Trust & Estate Planning 536 (ALI-ABA ed., 2002). (Lexis Nexis). 

[6] 9 Conn. Ins. L.J. 613, 628  citing Barry S. Engel, Eric D. Sanderson and Edward D. Brown, Asset Prot. Plan. and Contempt of Court, Asset Prot. Strategies 347, 627 (Alexander A. Bove, Jr. ed., 2002). (Lexis Nexis). 

[7] Id. citing, Denis Kleinfeld, Choosing an Offshore Jurisdiction, Asset Protection Strategies 74-85 (Alexander A. Bove, Jr., ed. 2002).

[8] 9 Conn. Ins. L.J. 613, 628 

[9]  Id. at 635

[10] Id. citing Citing, Leslie C. Giordani, Foreign Life Insurance Strategies, in 2 Int’l Trust & Estate Planning 539 (ALI-ABA ed., 2002. 

[11] 9 Conn. Ins. L.J. 635 Citing I.R.C. § 101(a) (West 2002).

[12] 9 Conn. Ins. L.J. at 635 citing, Gary S. Lesser, Lawrence C. Starr, Life Ins. Answer Book, For Qualified Plans and Est. Plan. 2-21 (1998)., at 2-1.

Tags: Business, Financial services, income tax, insurance, Life, life insurance, Private placement life insurance, United States

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