| Private placement life insurance is a pre-emptive IRS | | | | funds, private equity, derivatives, and real estate |
| audit tax strategy that transforms taxable ordinary | | | | investment trusts (there are functionally no restrictions |
| income and capital gains into tax-free income (with no | | | | on the types of investments that can be held and |
| income tax reporting required under current U.S. Law). | | | | managed inside the policy). |
| Please reference IRS Private Letter Ruling 200244001 | | | | Other benefits include the following: |
| (May 2, 2002). | | | | 1. Short-term capital gains (41% Federal/California |
| For U.S. Persons with investment income, private | | | | income tax): exempt from income tax. |
| placement life insurance provides for compliant, | | | | 2. Bond interest (taxed at 41% ordinary income rates |
| tax-free compounded earnings. | | | | Federal/California): exempt from income tax. |
| A private placement insurance policy is variable in | | | | 3. Policies in certain jurisdictions (e.g., Cayman Islands): |
| nature, which allows the insurance company to invest | | | | exempt from creditor attachment. |
| the majority of the premium(s) in a legally separate, | | | | 4. IRS audit risks are minimized since assets held under |
| segregated account to be managed by either an | | | | a qualifying life insurance policy are neither subject to |
| investment manager of the client's choosing or the | | | | income tax, nor is there any required income tax |
| insurance company itself. There are no guarantees | | | | reporting (under IRC §72(e)(5)). In addition to the |
| when it comes to the investment performance (as it | | | | substantive tax and reporting benefits, for audit |
| varies, so does the death benefit but with a fixed | | | | purposes there would be no presumed IRS tax |
| minimum). | | | | avoidance, due to the fact that life insurance has been |
| The income tax benefits are: | | | | granted an "angel exception" (i.e., is an IRS approved |
| 1. Assets inside a life insurance policy grow and | | | | transaction) (IRS Revenue Procedure 2004-65, |
| compound income tax free. | | | | 2004-66, 2004-67, 2004-68). |
| 2. Death benefit paid income tax free. | | | | 5. Policy lifetime withdrawals may be tax-free and not |
| Domestically in the U.S., investors have traditionally | | | | subject to tax reporting (as either a return of premium |
| used the tax benefits of variable life insurance policies | | | | basis or a loan). The Modified Endowment Contract |
| to invest in mutual funds. In contrast, international | | | | ("MEC") rules may or may not apply depending on |
| private placement life insurance policies allow users to | | | | policy design. |
| invest in a wider range of investments including hedge | | | | |