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Private Placement Insurance

Private Placement Life Insurance

Below is a short article on private placement life insurance. I do not personally recommend any tax or investment strategies or provide financial advice of any type but this topic is highly relevant to both hedge fund investors and professionals so I thought I would include it here:

A small but growing number of wealthy investors have discovered a legal way to invest in hedge funds without paying income taxes on the gains.

It's called "private placement" life insurance. These special insurance contracts allow policyholders to invest in a wide range of products, including hedge funds. The main attraction: Because the investments are held within an insurance wrapper, gains inside the policy are shielded from income taxes -- as is the payout upon death. What's more, policyholders may be able to access their money during their lifetimes by withdrawing or borrowing funds, tax-free, from the policy, depending on how it's set up.

Private-placement insurance policies are essentially variable insurance policies, which allow policyholders to invest a portion of their premiums in separate investment accounts. Though the policyholder can typically choose among a variety of investment options, there are no guarantees when it comes to performance. The strategy's chief advantage is the tax benefits that all life-insurance policies offer: Assets inside a life insurance policy can grow tax-free, and the death benefit can also be paid out free of income tax. Depending on how a policy is structured, the payout may also escape estate taxes.

Investors have long used the tax benefits of plain-vanilla variable life-insurance policies and annuities to invest in mutual funds. But private-placement policies allow users to invest in a far-wider range of options, including hedge funds, derivatives, real estate investment trusts and timber. Read more...

Private-placement policies are typically restricted to individuals paying at least $1 million in total premiums. They are offered by both domestic and offshore insurers, including American International Group Inc., Phoenix Cos.'s AGL Life Assurance Co., Sun Life Financial Inc., Massachusetts Mutual Life Insurance Co. and New York Life Insurance Co., among others. Read more...

The policies' tax advantages are particularly attractive for hedge funds. Because they trade frequently and often hold shares for very short periods, hedge funds -- lightly regulated investment pools for institutions and the wealthy that often employ risky strategies -- can generate a lot of short-term gains, which are taxed at up to 35% federally, rather than the 15% long-term federal capital-gains rate, plus state taxes. Another benefit: Assets in insurance policies may be off-limits to creditors, depending on the state or jurisdiction governing the policy.

John A. Anderson, managing principal of Tempewick Wealth Management LLC, a Mendham, N.J., wealth-management firm, says that he has set up twice as many private-placement insurance and annuity contracts this year than last year. Leslie Giordani, an Austin, Texas, lawyer, says that her private-placement legal work is growing about 30% a year. Sun Life's new private-placement business has more than doubled in each of the past three years, the company says. AGL Life Assurance says that its private-placement insurance and annuity premiums have been growing about 40% a year. "The buzz is growing more and more," says John Hillman, president and chief executive officer of AGL.

One big reason for the growth: In recent years, the Internal Revenue Service has issued a series of rulings and regulations that have laid out more clearly what's allowable and what's not in private-placement life insurance and annuities. That, in turn, has removed uncertainty among insurers and investors.

The regulations have "given us fenceposts," says Bob Chesner, vice president of AIG Life in Houston. "You know what you can and cannot do."

In issuing these guidelines, the IRS hoped to "shut down abusive transactions" in which investors would, say, buy a publicly available hedge fund and then stick it in an insurance policy solely to avoid taxes, says one IRS lawyer. The rulings were also designed so that insurance companies and investors "could have a clearer example of what's acceptable and what's not," he adds. The IRS says that it may issue further guidance on private-placement life insurance in the future. Read more...

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