THE Solution For The Long-Term Wealth Preservation
Peter Zihlmann
August 9, 2005
Now, if you are like most investors, you may turn away when you hear the term "life insurance". We don't really understand this natural stigma against insurance, but it's there. However, we recommend you give yourself a shove, step over your shadow and keep reading:
There might be some "neat tricks" you could learn...
Many U.S. investors spend hefty amounts of time and money to structure THE solution for their long-term wealth preservation plan. Complex legal structures are set up in remote offshore jurisdictions with names you can hardly pronounce in pursuit of that goal. The plan must provide for maximized tax efficiency, sufficient investment flexibility, attractive returns, personalized estate provisions and -- while we're at it -- solid asset protection.
Most investors come to the conclusion that the optimal solution is simply not affordable. Well, this is not quite true. Affluent investors do have options available. And these options may well achieve ALL of the aforementioned goals at affordable and time-efficient levels. Of course, you will have to think outside of "the box" -- and revisit the arena of insurance-based investment strategies.
Life insurance has long offered opportunities for tax-free investment growth.
Insurance companies invest the premiums that policyholders pay and credit interest to the policyholders based on the insurance company's investment results. Policyholders are not taxed on the growth of the cash values held within their policies, and their beneficiaries receive tax-free death benefits.
In addition, policyholders may access funds within those policies through loans and withdrawals usually without immediate tax consequences. While the tax consequences of investing through life insurance have always been attractive, the returns on those investments have not. With regard to traditional insurance products, the insurance companies are primarily concerned with protecting investment values to ensure the ability to pay claims; therefore, the companies' investment choices are necessarily conservative.
Variable insurance has been the life insurance industry's answer to these concerns.
By, in essence, segregating the investment reserves of variable insurance from its general investment portfolio and transferring all the investment risk of those investments to the policyholder, insurance companies are able to offer policyholders a much wider variety of investment options.
Private Placement Life Insurance - The Ferrari amongst variable life policies
Private placement variable life policies, also known as private insurance "wrappers", offer yet more options. For one, advanced policies allow the policyholder to designate a personal asset manager. In essence, this means that you, as an investor, can more freely determine the strategy, with which you would like your investments managed.
Traditionally, the minimum premiums have been substantial, usually in the neighborhood of $ 5 million to $ 10 million. This, of course, has limited the market's exposure to the very wealthy. However, minimums have come down substantially, as more and more big players discover the potential.
For instance, hedge-fund managers, known for the creative and innovative talents, have recently teamed up with life insurance companies to offer investors a way to get more "bang for the insurance buck". The method they've devised involves wrapping hedge funds in the private placement variable life insurance structure described here. These new products are designed to minimize the tax bite generated by the trading strategies some hedge funds employ. Most hedge funds have "high" turnover. Until now investors in those funds had no choice but to accept the tax consequences of the high portfolio turnover.
Hedge funds have led the way. Now structured products and specialized strategies such as convertible bond funds have moved in the same direction. With this growth in market-driven volume, some policies in the U.S. are now offered at minimums of only USD 1,000,000, while various offshore solutions are available for as little as USD 500,000 and under selective circumstances even for
USD 250'000.
In exchange for the higher minimum premiums, the policyholder realizes a variety of benefits:
First of all, the insurance company will allow you greater latitude in customizing the investment strategy of your funds. Keep in mind, however, that tax law prohibits you from having direct control over investments held within the confines of an insurance policy. But, you will certainly be able to more closely tailor the policy's investment direction in terms of your risk tolerance and other preferences, and you can even recommend the investment manager that will handle those funds subject to approval of the insurance company.
Secondly, the size of the investment gives you added leverage to negotiate costs associated with the policy. Typically, these costs include sales commissions, surrender charges, mortality and expense (M&E) charges, and asset management fees.
Premium taxes are a cost issue you must consider. Most U.S. states charge a premium tax ranging from 2.5% to 3.5% of the premium paid. That tax is based on your state of residence. Insurance companies also charge what they call a deferred acquisition cost (DAC) tax. This is not an actual tax. Instead, it is a charge that insurance companies add to premiums to cover the expenses associated with a change in tax law that lengthened the period over which those companies can deduct the costs associated with a new policy from one year to 10.5 years.
Offshore policies can broaden your benefits
Private placement variable life policies are exempt from SEC registration requirements when offered to accredited investors or qualified purchasers. These restrictions as well as the lack of market size has kept most offshore insurance companies from registering in the U.S. and from offering their products to U.S. investors.
In fact, offshore insurance companies will not send any product information onto U.S. soil. In order to invest in their offshore options, U.S. investors have to travel to the offices of the insurance companies abroad. While this may sound cumbersome and costly, the costs involved may be worth it:
Although a 1% federal excise tax may be imposed on premiums paid to offshore companies, investors can avoid the aforementioned higher state premium tax and the DAC charge by using an offshore insurance company.
Offshore companies are likely to stretch the envelope when it comes to permissible investments in the policy's separate accounts, and it is a natural for them to accommodate currency diversification and global investments. U.S. companies, on the other hand, are more restrictive in this regard. And they generally stick with more traditional investments and US$-denominated investments.
Various offshore policies allow for insertion of existing portfolios. While U.S. insurers will accept cash premiums only, offshore insurers will allow you to retain your current portfolio and roll it into the insurance policy. Subject to the insurance company's due diligence, you may retain your current custodian and / or asset manager.
Conclusion
Overall, variable life products allow policyholders to realize higher investment returns than traditional life insurance products while maintaining tax benefits. In addition, all life insurance products offer a variety of other planning options, such as irrevocable life insurance trusts or private split-dollar plans. A private placement variable life plan may offer further benefits.
Given the size of the investment required to establish a private placement policy, and the variety of issues involved in selecting the right product and company, be sure to discuss the overall ramifications with trusted tax and financial advisers.
TIME TO DIVEST YOUR DOLLARS - SMARTLY? Read our earlier article on this subject at:
www.gold-eagle.com/editorials_05/zihlmann011005.html
Accelerate your wealth preservation plan! November 26th to December 6th
An excellent opportunity to learn how to "accelerate" your wealth preservation AND growth strategy will offer itself next winter, from November 26th to December 6th.
The Inner Circle Wealth Strategies Cruise that takes place in the Caribbean this year, promises to be a once-in-a-lifetime opportunity to combine a great vacation with cutting-edge wealth management advice. Aboard the six-star
Crystal Serenity, undoubtedly one of the most beautiful and luxurious cruise ships today, an exclusive group of international financial experts and Swiss bankers will share their insights on current markets and a number of outstanding tax and asset protection strategies. One such approach is summarized below. We recommend you check out the details and register before the cruise is sold out.
www.bfi-consulting.com/inner_circle_forum/inner_circle_program.html
Peter Zihlmann
www.pzim.com
www.timeless-gold.com
investment@pzim.com
forex@pzim.com
August 9, 2005
Disclosure: The author has not been paid to write this article, nor has he
received any other inducement to do so. The author is a shareholder in the
company and will benefit from any increase in the company's share price.
Disclaimer: The author's objective in writing this article is to invoke an
interest on the part of potential investors in this stock to the point where
they are encouraged to conduct their own further diligent research. Neither
the information, nor the opinions expressed should be construed as a
solicitation to buy or sell this stock. Investors are recommended to obtain
the advice of a qualified investment advisor before entering into any transactions
in the stock.
Email this Article to a Friend 
Printer Friendly Version
