Article contributed by Michael Cobb, Director of Karlsberg Insurance, Belize C.A.
Belize is home to many forms of financial services legislation, including trusts, IBC’s, mutual funds, and what it’s perhaps best known for, banking. But there is a lesser-known set of laws that turn tiny Belize into a financial powerhouse. This is the insurance legislation in Belize that defines and regulates what is commonly known as an offshore VUL.
Switzerland, the Isle of Man, and Bermuda have long been famous for this type of product. But recently, the issue of US tax compliance has reared its head and upon examination of the tens of thousands of policies issued by companies in these jurisdictions, many are now found lacking. The tax implications for many clients are dire.
Belize, on the other hand, is relatively new to the industry. Companies here recognize the critical importance of US tax compliance as part of their product offering. The reason people want an offshore VUL are numerous, but in short, the product is like an unlimited and less regulated IRA, only better.
The major benefits of an offshore VUL are:
- Grow income inside policy tax free;
- Excellent flexibility to allow for virtually all types of investments;
- Distribute monies as needed without triggering a recognition of taxable gain;
- Never pay any tax on the investment growth;
- Pass the investments on to the next generation without any income or estate taxes;
- Maintain privacy and maximum asset protection over their investment property.
Many investors feel that they are losing too large a percentage of their investment gains to income taxes each and every year. These investors, whose portfolios turn over a number of times during the tax year, often lose as much as forty percent (40%) of their gains to a combination of federal and state income taxes. But the same investments inside an offshore VUL based in Belize grow totally tax fee.
Sounds impossible to have it all, doesn’t it? But maybe not. Let’s explore offshore or international life insurance as an investment vehicle.
For U.S. citizens and residents who purchase offshore U.S.-compliant, variable life insurance products, the possibility of all six of the above criteria may well be attainable. First, investments that are properly wrapped in a US-complaint variable life product do grow income-tax free. The product simply needs to meet the definition of life insurance, and the inside build-up will be a diversified, tax free, protected asset.
Second, almost any type of asset may be wrapped in a variable offshore insurance product. These products have tremendous flexibility as to their choice of asset managers and their various investments. It is, indeed, possible that an insurance company may accept in-kind assets such as collectibles and real estate as premiums, as long as the assets can be and are properly valued.
Third, variable life contracts may distribute monies to their owners up to the amount of their basic investment in the contract without paying any tax, and those same owners may also borrow additional monies from their contracts, paying themselves interest. The key here is to be sure that insurance contracts operate within certain guidelines outlined in the Internal Revenue Code and do not create a modified endowment contract.
Fourth, avoiding any income tax on the investment growth inside the qualified life contract is accomplished by holding the contract until the death of the insured. The investments, i.e. the inside build-up in the contract, will be transformed into life insurance proceeds with no tax to the owner.
Fifth, the next generation receives the proceeds income tax-free as life insurance proceeds paid to a named beneficiary, 101 IRC. And, if the contract is properly positioned in an irrevocable trust, it should avoid any estate tax as well.
The last, but not the least important, criterion that many investors are seeking is a combination of asset privacy and asset protection for their investments. A number of offshore jurisdictions profess to offer this privacy and protection, and a few actually do. But it is incumbent upon the investor to seek tax advisers who have the knowledge and experience to verify that these qualities truly exist in those particular jurisdictions. The offshore life insurance product possesses all of the creditor protection included with onshore life insurance and more, and is often enhanced by being owned in a foreign trust with additional protection granted by that trust’s governing jurisdiction.
In summary, the offshore customized variable life product is truly one of the most flexible and tax-efficient insurance investment vehicles ever conceived. But is it for everyone? Clearly the answer is “no.”
This last, best tax shelter is for those who need a tax-efficient vehicle, can qualify for life insurance, can commit significant premiums, want to globalize their investments, and have significant net worth of USD $3-5 million and above. Indeed, offshore insurance often performs better than domestic policies based upon lower charges and loadings, and is usually superior in the asset protection and asset privacy arenas.
Potential US clients must be aware that offshore insurance may not be negotiated, solicited, underwritten, or placed within the US. The process must be initiated and managed from start to finish outside the United States. Consequently, anyone with an interest in customized offshore insurance must contact and arrange to meet a representative of an offshore carrier outside the U.S., to receive all of the benefits offered by offshore insurance products.
Michael Cobb is a Director of Karlsberg Insurance based in San Pedro Town, Ambergris Caye, Belize. To learn more about international insurance, you can contact him at email@example.com or visit the Karlsberg website and download more information. http://www.karlsberginsurance.com