High-end life insurance policy option provides tax shield

Feb 21, 2011

Taxes could be lowered by specific life insurance policy type

A certain type of variable life insurance policy can serve as a vehicle to allow for tax-free investment profits, according to a report from the New York Times.

Private placement life insurance, the newspaper says, is frequently used by the wealthy to convert income from investments - including short-term capital gains, which are heavily taxed - into untaxable retirement income from the policy.

William Waxman - of Waxman Cavner Lawson, an insurance brokerage - said a variation on the instrument which places some funds overseas has fallen out of favor, however.

"You have very sophisticated estate planning lawyers in the U.S., but they don't necessarily have offshore practices," he said.

Other experts told the Times that the downsides of private placement life insurance include necessary micromanagement of investments and hefty premium payments of at least $1 million at the outset.

Experts say that while it's important to be aware of the life insurance options available, some policies might not be right for everybody, and consultation with a financial planning expert is frequently a good idea. 

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