Life insurance companies in the United States are increasingly developing formal programs to address the unique planning, structural, and tax needs of foreign national clients seeking U.S. life insurance. The U.S. life insurance industry offers many advantages over other countries’ carriers, including high death benefit capacity, relatively low insurance costs, well-capitalized insurers, stable currency, and a robust regulatory environment. These benefits have driven more U.S. life insurance companies to create foreign national programs to meet these clients' specific needs.
At Cedar Point Financial Services LLC, we experience foreign nationals pursuing U.S. life insurance for various reasons, often focusing on four primary goals:
- Procuring large death benefits (even jumbo face amounts)
- Solving U.S. estate tax issues
- Ultimate U.S. immigration
- Balancing international portfolios with a stable, U.S. dollar denominated asset
Large Death Benefits
U.S. life insurance carriers typically offer larger death benefits at lower costs compared to other countries’ carriers. This is due to the financial strength of U.S. insurers and favorable pricing from global reinsurers who view the U.S. market as less risky. For example, life insurance in countries such as Mexico, Taiwan, and many others can cost twice as much and be limited to significantly lower death benefits than U.S. policies. In Taiwan, it is difficult to purchase more than $3 million in coverage and that sum is in the New Taiwan Dollar, a less desirable currency in comparison to the U.S. Dollar. For those seeking substantial coverage, the U.S. market is a practical choice in that even hundreds of millions of death benefit can be procured cost-effectively.
As little as a decade ago, foreign nationals avoided U.S. life insurance to steer clear of U.S. tax implications and privacy concerns. However, international tax transparency laws like FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) have changed this perspective. Now, foreign nationals, especially those familiar with the U.S., are more comfortable purchasing large U.S. life insurance policies and complying with either any reporting of the purchase to their home country under a tax treaty or, in the alternative, paying a default withholding amount on any policy distribution.
The life insurance specialists at Cedar Point Financial LLC encourage foreign national clients with a need for significant life insurance coverage to consult with a team member to determine what options are available.
Addressing U.S. Estate Tax Liability
Foreign nationals with personally owned U.S. property, including real estate, tangible personal property, and U.S. corporation stock, create a U.S. estate subject to estate tax. An executor must file an estate tax return if the value of these assets exceeds $60,000 at death. This is in stark comparison to the significant federal estate and gift tax exemption of $13.61 million each U.S. taxpayer is entitled to in 2024. Given that such a large portion of a foreign national’s U.S. estate may be subject to estate taxation, it makes sense that the income tax-free death benefit from a U.S. life insurance policy is commonly used to pay these taxes.
It is often advised for foreign nationals to own their U.S. policies through U.S. trusts or LLCs, which are usually beneficiaries of the policies. This strategy can be crucial, as illustrated in this example: Client is a Chinese national seeking $50 million in life insurance coverage to pay a projected estate tax on his $125 million in U.S. assets. The required coverage was achieved through two policies from two different insurance companies, and both owned in a Delaware trust to situs the ownership in the U.S. The trust is also the beneficiary of the policies’ death benefits and will distribute proceeds as directed by the trustee.
Cedar Point Financial Services LLC works with a foreign national clients’ other advisors in properly structuring life insurance ownership and beneficiary arrangements to protect policies from adverse tax and regulatory impacts.
Pre-Immigration Planning
Foreign nationals planning to immigrate to the U.S. often focus on reducing their future U.S. estate by transferring assets into an irrevocable trust. A common technique is for a foreign grantor to transfer funds to an irrevocable foreign grantor trust which is often domiciled in the United States and where the funds are used to buy a U.S. life insurance policy on the life of the grantor. The U.S. tax code provides for the tax-free transfer of assets to a U.S. taxpayer from a non-U.S. taxpayer, including the transfer to an irrevocable trust.
Tax efficiency is achieved in one of two ways: first, when the foreign grantor dies, and the grantor trust becomes a foreign non-grantor trust with U.S. beneficiaries. Those U.S. beneficiaries, usually the grantor’s children or grandchildren, are not harshly taxed on the trust’s undistributed income since the transferred funds are growing tax-free as part of the policy’s cash value. Alternatively, if the grantor becomes a U.S. taxpayer and is subject to U.S. estate taxation at his or her death, the income tax-free life insurance death benefit paid to the trust can be used to pay the grantor’s estate taxes.
Another common planning strategy is where the grantor trust purchases life insurance policies on the grantor’s adult children. At the death of these insureds, the life insurance policy proceeds paid to the trust can benefit the grantor’s grandchildren.
Before becoming a U.S. taxpayer, a foreign national should consult with Cedar Point Financial Services LLC and other advisors to take advantage of planning opportunities that arise as a result of exemption from U.S. gift taxation.
A Desirable Asset Class
U.S. life insurance is not only sought after for its sizable death benefit capacity but also as a stable asset class held within international clients’ portfolios. Permanent life insurance policies provide a tax-free death benefit, offering a stable return with low risk, therefore making them ideal for hedging against riskier investments. U.S. life insurance can diversify investment portfolios by providing future liquidity while de-risking international investment portfolios.
For instance, many high-net-worth clients from Latin American and Asia-Pacific are increasingly viewing U.S. fixed account life insurance contracts as a means to diversify their funds while benefiting from the stability of the U.S. dollar and attractive life insurance policy contractual guarantees.
Foreign National Programs
U.S. life insurance companies have responded to the growing demand from foreign nationals by creating formal application programs. These programs outline components such as permitted countries of residence, maximum death benefits allowable, required U.S. connections/nexus, underwriting categories, travel considerations, and medical exam requirements. While the COVID-19 pandemic temporarily reduced available death benefits and underwriting classes, the trend over the past four years has been to make U.S. policies more accessible to foreign nationals, reflecting insurers' proactive marketing efforts in this space.
Today, several U.S. life insurance companies are offering the ability to secure at least $65 million in coverage for residents of dozens of countries with higher amounts subject to approval by reinsurance companies. Further, underwriting requirements have become more friendly with life insurance medical examinations permitted outside of the U.S. in places such as London and Hong Kong.
The process of obtaining U.S. life insurance for foreign nationals has never been easier. Contact Cedar Point Financial Services LLC to learn which program is best suited for your or your client’s individual situation.
We Are Here to Help
The U.S. life insurance industry offers foreign nationals significant advantages, including large death benefits, tax-efficient estate planning, and access to stable investment opportunities. As U.S. insurers continue to enhance their foreign national programs to make it easier to purchase policies, these clients are finding U.S. life insurance an attractive and practical solution for their diverse needs. At Cedar Point Financial Services LLC, we work with clients’ legal, accounting, and other advisory professionals in developing and implementing strategies that optimize their individual and business financial plans.