Life Insurance- A Great Investment Platform For Just The Ultra Rich?

Online, February 10, 2011 (Newswire.com) - Some of the best financial secrets are kept in tight circles for only the "ultra rich" to benefit from. Luckily, we found this article from the NY Times explaining just how life insurance can be used as an investment strategy to save money on taxes. It can be rather tricky though, so make sure you work with someone who really understands these mechanisms.

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IT'S viewed as an insider's secret for the affluent: a legal way to invest in hedge funds and other potentially lucrative assets, all without paying taxes on the gains.

PRIVATE Life Insurance Can Make You Money Is It For The Ultra Rich?

But private placement life insurance, as it is known, is still unfamiliar to many wealthy people - and trickier to design properly than even some savvy investors realize, tax lawyers and financial advisers say.

"It sounds so good - 'I can invest tax-free and get the money' - but it's actually very complex," said Jonathan Blattmachr, a retired estates and trusts partner from the Milbank Tweed law firm in New York.

Private placement life insurance is an investment wrapped inside an insurance policy. The Internal Revenue Code treats the taxation of insurance differently from that of investments, like stocks or hedge funds, and does not levy federal income tax or the 15 percent capital gains on a life insurance policy when it pays out upon the death of the holder. So by stuffing an otherwise taxable investment inside a tax-free life insurance policy, investors can reap the compounded gains of that investment and the death benefit, all tax-free.

The insurance is a form of variable life insurance whose cash value depends upon the performance of investments held in the policy. It is particularly lucrative because hedge funds, which trade frequently, otherwise often carry the 35 percent short-term capital gains tax.

William Waxman, a principal at Waxman Cavner Lawson, an insurance broker for the wealthy and a financial adviser in Austin, Tex., said that demand for hedge funds, even in a down market, "is driving a lot of the private placement insurance market." Still, he said, the private placement life insurance industry was relatively small; the cash value of all policies outstanding amounts to perhaps $4 billion to $5 billion. While brokers pitched the policies to many family offices on the East Coast, he said, West Coast offices appeared less tapped.

There are other lucrative benefits besides the absence of income taxes.

When structured properly, the gains and the death benefit can escape estate taxes and go to your heirs tax-free when you die. If structured through an offshore entity, like a foreign trust, the gains can remain out of reach of creditors or those who might sue you.

But investors appeared to be shying away from the foreign variant, Mr. Waxman said, in part because "you have very sophisticated estate planning lawyers in the United States, but they don't necessarily have offshore practices."

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To read the rest of the article you can see it here at the NY Times.

This article raised some interesting points to consider. First, are you using all of the tools available to you to create wealth for your family? Second, do you have the right coverage for your situation? You find out more by visiting http://thelifeinsuranceguide.org.