Why Purchase U.S. Life Insurance
- Cost Savings - The U.S. has the single most competitive life insurance industry in the world. As a developed nation, we also have lower mortality rates and thus lower mortality costs. The combination of competition and low mortality costs creates substantial savings potential. For example, a comparison of U.S. life insurance to Mexican life insurance would show a discount between 60% and 80% in the premium costs. This translates into exponentially higher internal rates of return on both the cash value build up and the death benefit for the heirs. In some countries, and if structured properly, the deposits (premium payments) can be tax deductible to the business. This, coupled with the tax benefits of the policy itself, make for unbeatable tax planning.
- Tax Efficient Investing - For over a century, life insurance in the U.S. has retained very favorable tax treatment on the cash value accumulation within a policy. If structured correctly, the cash value within a policy will accumulate without tax. It can also be withdrawn without tax using loans (which are ultimately repaid by the death benefit, which is also free of income tax). This makes life insurance a very attractive and safe investment vehicle. U.S. insurance companies have a wide array of options to choose how the underlying cash values will be invested. Two of the most popular are “Whole Life” policies (which yield a guaranteed fixed return) and “Indexed Universal Life” policies, which allow for participation when the market goes up and principal protection if the market goes down. Below are historical net compound averages on the underlying cash values for both types of policies:
Policy Type 30 Year Historical Net IRR (tax free) Whole Life 6.36% annually Indexed Universal Life 8.3% annually
- Asset protection/ Pre-Immigration Planning - Life insurance policies and their underlying cash values are often considered a safe haven for asset protection purposes. Another layer of protection is added through the use of trust ownership. These trusts can be either grantor or non-grantor trusts which can help provide anonymity and if done prior to immigration, can help avoid exposure to U.S. transfer/estate tax.
- Patrimonial Planning - It is very common for Foreign Nationals to own U.S. based assets and/or have U.S. beneficiaries (i.e. a grandchild born in the U.S. or a child who was educated in the U.S. and never left). This scenario raises a whole host of international tax issues related to U.S. estate tax and the transfer of domestic and foreign assets. If structured correctly, life insurance can be a great tool to create tax-free liquidity for future generations. If done properly within a trust (i.e. Dynasty Trust), those assets could avoid transfer tax to all future generations.
- Dollar Denominated Assets - As the world’s reserve currency, Foreign Nationals have often found the dollar to be a safe place to store cash, especially when their home country has a volatile currency. Currently, many are storing their money in short-term treasuries which have minimal yield. Life insurance policies with fixed returns offer tax efficiency and much higher yields while still allowing for dollar denominated assets.
- Reputation and Financial Stability - Never in U.S. history has a life insurance company not paid a death benefit due to financial insolvency. The U.S. life insurance industry has its roots back to the mid 1800’s and many of those companies are still around today. Many have incredibly stable balance sheets as they are both conservative and highly regulated. For example, some U.S. companies have a 150-year history of paying dividends to policy owners without ever missing a single year (even through the great depression). That said, there are some insurance carriers that have ancillary business activities (ie. AIG) that have been them at risk. It’s for this reason that Copperstone Partners works only with insurance companies that meet stringent criteria and have demonstrated financial stability over many consecutive decades.