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Private Placement Insurance Again Gaining Popularity for Investor's Income-tax Planning

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Monday, 09 Jul 2012 09:56 AM Current | Bio | Archive

Private placement insurance is becoming popular particularly when taxes on investments are going up.

Just between the increase in income tax rates starting January 1, 2013, and the laundry list of Obamacare taxes, taxpayers who have any sort of money are going to have a lot less of it next year after paying tax.

Does 43% or 44% tax on interest and dividends work for you?

If not, then private placement insurance may be for you.

Both life insurance and annuities effectively allow investment income within the policy to compound in a tax free environment. A very good result when tax minimization is the object of the exercise.

Many investors like their current investment advisors or money managers. Both private placement life and private placement annuities are primarily variable financial products where the policyowner can appoint the independent investment advisors to manage the policy investments.

There is no restriction under federal income law as in which the policy assets can be invested. What is not allowed is that neither the investments nor the independent advisors can be controlled, directly or indirectly, by the policyowner.

For income tax purposes the investments must be adequately diversified.
Diversification for this purpose means that there are at least 5 different investments held in certain percentages. A normally diversified portfolio easily qualifies.

Investors are finding out that private placement insurance allows the investment advisor flexibility including using otherwise tax-inefficient investments in a tax efficient environment.

With typical life insurance, for example, the amount of insurance is driven by a needs based analysis with a premium charge accordingly. With this form of variable insurance the insurance cost is only the difference between the death benefit and the cash surrender value.

For an investor utilizing private placement life, the greater the amount of cash value accumulation, then the amount of pure mortality insurance goes down and so does the premium.

In any event, with proper structuring it becomes possible to withdraw and borrow assets from the policy's cash value which is free of tax.

Most clients ask me if a private placement insurance policy can be protected from creditors. Florida and other states which provide for insurance or annuities to be exempt from creditors the answer is that it's quite ideal for asset protection purposes.

In other states, using some typical estate planning techniques will get the same result.

Even better for asset protection is using a non-U.S. tax compliant private placement insurance policy. If nothing else, it lowers the risk exposure of a creditor making a claim under a fraudulent transfer remedy statute and increases the ability to prove up the defense.

Financial planning, estate planning, asset protection planning, and income tax minimization planning are individually complex undertakings for a planning professional. Even more daunting is a plan which is going to include all four.

Insurance is generally one alternative that works for financial, estate, and asset protection planning.

Private placement insurance is gaining in popularity as investors once more recognize that to minimize the risk of increasing income tax rates on investments, there are few government acceptable alternate choices.

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