Types of International Life Insurance

In this section, we are primarily referring to life insurance products that typically provide for the build-up of assets — primarily whole life and universal life. These policies are sold in jurisdictions that avoid many of the burdensome regulations that govern policies sold in more traditional jurisdictions, such as the United States, Canada, the UK, Australia and New Zealand.

What can offshore life insurance offer?

The benefits offered by offshore life insurance include:

• 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

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. By and large, however, 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 (policies 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 (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.

There are therefore three advantages offered by offshore life insurance:

• Lower cost structure Lower overhead costs and mortality assumptions may be used to provide more favourable 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 limited in what investment vehicles they can offer, many offshore life insurance companies offer a much larger selection of such vehicles. The purchaser of such an insurance policy has a bountiful choice of the type of investments he wants, the location of such investments, and even the managers of those investments.
• Asset protection The ability to maintain confidentiality and protect assets from certain people and entities is one which any offshore insurance policy can offer.

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 insurance 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. You should always use the services of an experienced international consultants to assist you in selecting a policy.

 Paul Wolf / Expatica