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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. 

What types of International Life Insurance are we referring to?

We are primarily referring to Life Insurance products which typically provide for the build-up of assets, such as Whole Life and Universal Life, and which are sold in jurisdictions which permit the insurance companies offering those policies to 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.

What specifically can offshore life insurance offer in this regard?

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

Generally, if you put your money in a bank, mutual fund, or one of the many other interest earning methods 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.  For example, 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!

Except, that is, for the earnings within a life insurance policy. Simply put, this means that in many countries there is no tax payable on the accumulation of income and earnings within life insurance policies, unless and until the owner of the policy receives those earnings.  Even then, there are many ways to reduce the tax liability of those earnings, depending on how the physical receipt of the income is structured.

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.

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 fact 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. 

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 (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. 
 
 

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 the regulations within your specific Home Country (and/or any country in 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 in-surance portion of the policy. 

At all times, the net amount of actual life insurance which remains within the policy must meet the 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. 

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 all aspects of the purchase and management of such a policy.

So, 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, once again, that there are no bargains out there. You should always use the services of an experienced international consultants to assist you in selecting a policy. 

© Copyright 2001 by IBC – not to be copied or duplicated without written permission.

Paul Wolf is president of Innovative Benefits Consultants www.shire.net/ibc/
He can be contacted at: info@ibencon.com - or by phone or fax at:
London +44  (870) 737-9000 ext 6129
New York  +1    (212) 328-3030  ext 5854 
Singapore +65  347-8333  ext 0303