Innovative Benefits Consultants: Introduction to International Insurance

Life Insurance - The Use of International Life Insurance
in Tax Planning

Beyond the basic uses of Life insurance to provide a
cash payment to your beneficiary(ies) in the event of
your death, certain types of International Life Insurance
can be used in wealth preservation strategies.

The topics we'll cover are:

What types of International Life Insurance are we referring to?

What specifically can offshore life insurance offer?

How does this happen?

How can I access the assets within such a policy?

What other advantages are there?

What do I have to be concerned about?

OK, what’s the bottom line?

What types of International Life Insurance are we referring to?
In this section, we are primarily referring to Life Insurance products which typically provide
for the build-up of assets - primarily Whole Life and Universal Life and which are sold in
jurisdictions which permit the insurance companies offering those policies avoid many of the
burdensome regulations which govern policies sold in more-traditional jurisdictions, such as
the United States, Canada, the UK, Australia & New Zealand, and many other countries.

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   What specifically can offshore life insurance offer?
Among the many benefits offered by Offshore Life Insurance,
the following are noteworthy:
   Tax free appreciation of investments
   Substantial liquidity in the investment account
   Low-cost borrowing from the investment account
   Tax-free receipt of the death benefit

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How does this happen?
Generally if you put your money in a bank, mutual fund, or one of the many other methods
of earning interest to increase your capital wealth, the governments of many countries will
tax that income and other increments to your capital. This tax is frequently applied whether
you actually received that additional income or not - i.e. you may be liable to pay taxes on
those earnings, even if you decide to leave the money wherever it is in order to compound the
earnings potential of your capital.

(Obviously there are exceptions to this rule – for example, tax-free investment income,
such as governmental bonds and other non-taxable entities - but by and large you can't
escape the taxman!)

Of course, if the income is taken in the form of a payment to your beneficiary(ies)
in the event of your death, those monies are generally sheltered from inheritance
and estate taxes. Moreover, as noted previously, an offshore policy gives the policy
owner the flexibility to decide where such proceeds should be paid.

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How can I access the assets within such a policy?
Insurance policies typically permit the policy owner to borrow funds from the assets
of the policy, frequently at below-market interest rates. This can provide a method
by which a policyholder can create an income stream to himself by borrowing against
his own assets, and therefore avoid the test of passive income which many countries
apply in deciding whether or not to tax income received by a resident.

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What other advantages are there?
Domestic Life insurance (those policies which are sold within the jurisdiction of a specific
government) must generally comply with an ever-increasing burden of regulations and tax
consequences governing their management and investment actions.

These regulations typically define the types of investments in which these insurance companies
can hold their assets, the types of investments they are permitted to offer you, what reserves
they have to retain on their life insurance policies, the mortality assumptions they have to make
in calculating the risk on their insurance policies, and the commissions they have to pay to
those who market their insurance products.

International life insurance policies (i.e. those sold in jurisdictions where many of these
regulations do not apply) are generally not subject to these burdens and can therefore
offer greater flexibility and access to investments and funds which may not be available
through domestic life insurance.

Thus, in summary, there are three major advantages offered by offshore life insurance:

  Lower cost structure:
      Lower overhead costs and mortality assumptions may be used to provide
      more favorable calculations of the risk portion of their premiums (i.e.
      that part of the premium which is used to provide the death benefit).

  Greater freedom to choose investments:
      Since they are not as limited in what investment vehicles they can offer, many offshore
      life insurance companies offer much larger selection of such vehicles. The purchaser
      of such an insurance policy has a bountiful choice of the type of investments to choose
      from, the location of such investments, and even the managers of those investments.

  Asset protection:
      The ability of maintain confidentiality and protect assets from certain people
      and entities is one which many offshore insurance policies can offer.

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What do I have to be concerned about?
As always, you need to be aware of the ownership and financial standing of any
insurance company that makes a proposal to you.

You also need to be aware of regulations within your specific Home Country (and/or
any country to which you pay taxes) which may impact various aspects of the management
of your investment portfolio within the insurance policy. As an example, in order
for an offshore life insurance policy to qualify under US tax laws as a tax-free vehicle,
it must meet certain IRS criteria governing the types of investments; the diversity of
such investments; the advisor who is managing those investments and the ratio of those
investments to the life insurance portion of the policy.

At all times, the net amount of actual life insurance which remains within the policy must
meet the applicable criteria of what is an insurance policy as opposed to a pure investment
contract. In other words, if a policyholder borrows too much from the assets of the policy,
there may be insufficient funds for the policy to be deemed a valid insurance policy within the
relevant tax jurisdiction(s).

The policyholder of record of an Offshore Life insurance policy is frequently a Foreign Trust
which has been created to manage all aspects of the policy and to provide the degree of
ownership which will meet the criteria, if any, set by any government to which the insured
must report.

Each country has its own regulations governing various aspects of offshore life insurance
and it is therefore imperative that a qualified tax advisor be consulted on on all aspects
of the purchase and management of such a policy.

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OK, what’s the bottom line?
In this instance, the life insurance may not just be for the survivors of the insured – but
can also provide a great deal of protection for the insured. As always, it should be a part
of an overall financial plan which takes into account all of your other assets and liabilities.
Remember it’s you who has to make the final decision to buy it - while you can.

This quick look at the uses of International Life insurance in Tax Planning is to remind
you, as always, that there are no bargains out there. You should always use the services
of experienced international consultants to assist you in selecting a policy.

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   Sources
The information provided is based, in part, on the following articles:

   "Offshore Variable Universal Life Insurance Concept"
      by Brain Yacker of Rowbotham & Company LLP
        [This website contains several other excellent
        articles on International Taxation for US citizens]

"Offshore Life Insurance in Wealth Preservation Strategies"
by William D. Kornreich and Robert M. Burkarth III in 'Escape Artist'
[originally published in 'Offshore Finance U.S.A.']

"The Strategist: Offshore Life Insurance pacts good tax-saver"
by Alan Legatz in 'Naples Daily News'

Back to the Introduction

Back to the Individual International Life Insurance article

Go to the International Health Insurance articles

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