Crown global | Insurance is contractually based and therefore has many inherent advantages for policyholders, beneficiaries and trustees. Life Insurance contracts remain one of the most efficient and compliant ways of growing, preserving and transferring wealth. Many advantages of life Insurance are associated with its favorable tax treatment, asset protection and flexible investment options.
In addition to life insurance protection, insurance products have offered tax-free or tax-deferred benefits for many years. Life and annuity policies can be tailored to meet the specific investment objectives of high net worth families through customized private placement products. Generally, this means that a policy can be designed for qualified investors so that the investment portion of the policy (the cash value or principal) can be managed by a manager selected by the policy owner or invested in a hedge fund designed for insurance company accounts. While the number of companies offering these policies is relatively small, the choice of managers is virtually unlimited and the number of insurance dedicated funds (hedge funds for insurance accounts called "IDFs") is growing rapidly. Private Placement policies now offer the same prospect of high returns through alternative investments with a managed account or hedge fund investment with one exception: the returns inside a policy are tax-free or tax deferred, while the returns of a direct investment are currently taxable, often at ordinary income rates.
Variable Life Insurance
- Efficient, low cost structure
- Option for significant death benefit in excess of policy account value
- Wide range of investment options including qualified hedge funds
- Investments compound tax free
- Ability to access policy assets in a tax favorable method
- Investor’s separate account is insulated from the financial/credit risk of the insurance carrier
- If structured accordingly, policy death benefit proceeds can be transferred to beneficiaries in a tax efficient manner
- Typically no surrender fees or cancellation penalties
Private Placement policies are only available through a private placement offering to accredited and/or qualified purchasers who must meet the suitability standards required under the applicable securities laws to the purchase of the policy. These rules are the same as the rules that apply to an investment in a particular hedge fund, and in each case, the beneficial owner of the policy must complete a questionnaire establishing suitability.
Private Placement policies are also “variable”, which means that the policy owner allocates the assets to one or more third-party asset manager or an IDF. The proceeds of the policy will be a combination of the return on these investments and, in the case of a life insurance policy, the amount of death benefit set forth in the contract. To qualify as life insurance, a certain amount of risk must be borne by the insurance company based on the insured’s age, health and sex.
Private Placement policies are also “universal” policies, meaning that after the first premium payment there are no mandatory payments required as long as there are sufficient assets to pay for the cost of insurance on the policy and other current charges. Private placement policies usually require minimum premium payments on the order of several million dollars, and premium payments can be stretched over several years. Once the insurance company receives the premium and the funds are allocated to one or several managers or IDFs, the policy owner is generally permitted to change managers or select new funds at periodic intervals. Such changes or reallocations are tax-free so that the gains derived on the sale of one fund are available in full for an allocation to a new fund. Moreover, there are generally no or minor administrative charges when funds or managers are changed.
Another important opportunity for Private Placement investors is the opportunity to access the funds within a policy by borrowing from the policy. If the policy is structured as a non-modified endowment policy the funds may be borrowed at market interest rates without any tax effects. The loans do not have to be repaid during the lifetime of the borrower and may be repaid tax-free out of the proceeds of the policy on the death of the insured.
Deferred Variable Annuities
- Efficient, low cost structure
- Wide range of investment options including qualified hedge funds
- Investments compound tax deferred
- Investor's separate account is insulated from the financial/credit risk of the insurance carrier
- Typically no surender fees provided funds are accesed after age 59 and ½ of the annuitant
Deferred variable annuities operate in the same fashion as life insurance policies during the lifetime of the owner in that gains accrue tax-free. Distributions are taxable, however, at ordinary income rates and are apportioned between income and the return of capital. The period of deferral can be continued where the beneficiary of the policy is a spouse and taxes can be avoided if there is a charitable beneficiary. Gains distributed to an annuitant who has not attained age 59and ½ are subject to an additional 10 percent penalty tax. The advantage of an annuity is that it does not require underwriting - there is no life insurance component, which means that it can be issued quickly. Moreover, the cost of an annuity is less since there is no need to pay for the insurance risk.
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