Are you a foreign national looking into getting life insurance in the U.S? Are you wondering what are the tax advantages of life insurance for foreign nationals?
Well, you came to the right place. In this post, we will outline why a foreign national may consider buying life insurance in the U.S., we will touch on the available options and the major tax advantages life insurance offers.
Before we go any further, we would like to stress that we are not able to provide you with tax advice. This post serves as an outline only.
You should always consult with your tax accountant and international tax attorney, as different countries follow different tax code.
Since we got that out of the way, we can dive into the topic.
Life Insurance For Non US Residents
The topic of life insurance for foreign nationals and non-residents is ever changing.
Life insurance companies are trying to keep up with the current world events and often update their guidelines.
However, there are a couple of requirements that remain constant, such as:
- The Question of Your Residency – Life insurance companies want to know if you are planning on living in or outside of the U.S. This will help them evaluate your application and determine if you fit into their set of rules.
- Financial Ties to the U.S. – In other words, “Why getting life insurance in the U.S. makes finical sense for you”. There are several ways to fulfill the financial ties requirement. For example, if you:
- Are married to a U.S. citizen
- Own real property in the U.S.
- Are an employee of a U.S. based company here in the country
- Have business requiring you to have regular visits to the U.S. and etc.
- Be In The U.S. For The Application Process – This will include the quote, application, medical exam and policy delivery.
Tax Advantages Of Life Insurance For Foreign Nationals
The U.S. tax code provides many tax breaks when it comes to life insurance.
The biggest one of them is that generally, the death benefit is income tax-free for the beneficiary.
According to the IRS regulation:
Life insurance is treated as intangible personal property and considered non-U.S. situs property for U.S. estate tax purposes. The death benefit from life insurance on the life of the non-resident alien will not be subject to U.S. estate tax.
In other words, if Jim has a $500,000 life insurance policy on himself and passes away, his beneficiary will receive the death benefit income tax-free.
This is a major tax advantage, making U.S. life insurance more appealing for foreign nationals and non-residents.
Another thing to consider is that life insurance can be used as a way to continue your business in the U.S.
You can take advantage of life insurance policies such as a buy-sell agreement and key man life insurance, to ensure that your business or corporation will continue in the event of owner/partner passing.
Types of Life Insurance Policies Available
We will step aside from the subject of tax, to discuss what life insurance options may be available to a foreign national seeking coverage in the U.S.
We feel it is important to have a good understanding of the existing products.
This will make it easier to select the coverage that best fits your needs.
There are 2 major types of life insurance: term and permanent.
Now, why does this all matter to you as a foreign national?
Permanent insurance is an available option in most instances for non-residents or foreign national.
Based on your residency, life insurance companies may not offer a term life insurance product for non-residents. So let’s discuss your permanent life insurance options.
Indexed Universal Life (IUL)
Indexed Universal Life Insurance is a permanent insurance policy that is designed to function as an asset.
It allows you to view life insurance as much more than a form of risk management.
IUL combines a death benefit with the potential to accumulate cash value. The built-up cash value can also serve as an additional source of potential income during the life of the policyholder.
The growth of the IUL policy’s cash value is based on the performance of equity indexes, such as the S&P 500 or similar indexes.
Advantages Of An IUL
- It provides a death benefit, in case you pass
- IUL combines insurance and investment components
- It is one of the most flexible insurance products on the market
- It guarantees not to lose money in your cash accumulation account due to market downturns. This is HUGE!
Tax Advantages of Indexed Universal Life Insurance For Foreign Nationals
In addition to the tax advantages of any life insurance policy in the U.S., IUL offers further benefits:
- The policy is structured to provide you with the coverage you need while it also accumulates cash value.
- The death benefit is tax-free for the beneficiary – the beneficiary will not have to worry about U.S. taxes on the proceeds from the life insurance
- The premiums are paid and the cash value account is funded with after-tax dollars – when you fund a cash accumulation product, such as a traditional 401(k), with pre-tax money, you pay taxes on the funds when you withdraw them. On the other hand, if the funds are after tax, you can make withdraws tax-free.
- The interest in the account is compound – the interest built into the cash value account is the addition of interest to the principal sum of a deposit. In other words, you will have interest on interest.
- The cash value is tax-deferred – any increase in the cash value of the insurance policy due to investment gains is not taxed until you begin to withdraw the money
- There is no IRS reporting required
- There are no distribution penalties
Permanent insurance is one of the most powerful tax planning tools you can find!
Combine that with the favorable tax treatment life insurance policies have in the U.S., and you have an amazing product.
Do not hesitate to contact us if you need additional information or would like us to create a custom quote.
We will walk you through the process of getting life insurance and guide you every step of the way.