How to use a life insurance wrapper to minimize taxes on securities investments.

• Author: Press, Israel
• Position: Bibliography

Owners of life insurance policies are not taxed on the growth of investments held by those policies. In addition, these owners can access funds within those policies without tax consequences, through loans and withdrawals.

A private placement, variable life insurance wrapper (private placement wrapper) offers investors an opportunity for substantial tax-free buildup of investment benefits, while still allowing access to funds. Private placement wrappers should be set up as nonmodified endowment contracts in which premiums are paid over several years. If the premiums are paid all at once through a modified endowment con tract, loans from the policy would be taxable.

In essence, a private placement wrapper places investments a taxpayer might make anyway inside a life insurance contract, thus combining sought-after investment results with the tax advantages of a life insurance policy. Taxpayers can select an investment adviser to manage the assets (e.g., a hedge fund manager). The choice must, however, be approved by the insurance company underwriting the private placement wrapper.

In essence, instead of purchasing investments, a taxpayer pays premiums, which are invested by the insurance company through an investment adviser the taxpayer selects.

Private placement wrappers are generally appropriate only for high-networth individuals and have minimum premiums of several million dollars. Wrappers are usually written with an offshore insurance company to avoid state premium tax and deferred acquisition tax, which total approximately 4%. Offshore wrappers do incur a 1% excise tax for transferring assets offshore.

Negotiate Lower Expenses

Because insurance companies keep separate accounts for variable life policies (which are treated as a separate line of business), insureds can negotiate low load (surrender) charges.

While retail variable life products may have load charges that exceed 100%, insureds under private placement wrappers can negotiate load charges of less than 10%...