Supply a solution with guaranteed universal life insurance
by Rod Rishel
Rod Rishel is Chief Executive Officer of Life, Health and Disability, AIG Consumer Insurance. He can be reached at rod.rishel@aig.com.Last September, NASA scientists discovered water flowing across the surface of Mars – a development that prompted 10 million related Google searches, and was cited as a potential breakthrough in the quest for life beyond Earth and human hopes to one day travel to the Red Planet.
You may never know anyone who journeys that far, but the likelihood is rising that you know people who have traveled to America from abroad, remained here, and may stand to benefit from our industry’s products and services.
According to recent Census Bureau projections, the number of foreign-born persons living in the United States will soar 85 percent, to 78.2 million people, by 20601. The native-born population is projected to grow only 22.5 percent during the same time span2.
The shift in demographics seems to be well underway. As the Pew Research Center has indicated, the share of the U.S. population that is foreign-born is projected to break, in the next decade, a record that has stood since shortly after the turn of the 20th century3.
While some who arrive in America will become U.S. citizens, others will remain foreign nationals. Like many other multicultural clients, foreign nationals often have unique planning needs, which may include wealth protection, accumulation and distribution. The need for protection from U.S. estate taxes may be critical.
How lifetime tax-exemptions vary
Consider the difference in lifetime estate tax exemptions between Resident Aliens (RAs) and Non-Resident Aliens (NRAs). The disparity is huge: currently $5,450,000 for RAs versus $60,000 for NRAs. Non-Resident Aliens have a more limited opportunity to pass along wealth.
Moreover, many lack life insurance protection. For example, LIMRA data indicates that only 48 percent of Chinese-American people, a population whose growth is due primarily to immigration, own an individual life insurance policy4.
However, as a financial professional, you have the potential to leverage life insurance to help foreign nationals preserve wealth for generations to come. Guaranteed universal life (GUL) insurance may be the key.
GUL: A Go-To Product
Foreign nationals come to the U.S. in part for mature insurance and investment markets, and when seeking estate planning help, may be pleased to learn that GUL is designed to provide long-term security and flexibility. The product has served for many years as a solution for a wide variety of individual, family and small-business needs.
Furthermore, although many carriers have exited the GUL market, the product actually is available in a recently refreshed format (for example, with an optional longevity rider and a return-of-premium feature). This GUL solution merits consideration as a wealth-preservation strategy for foreign nationals with U.S. situs assets.
As a reminder, U.S. situs assets include U.S. real estate, almost all personal property located in the U.S. (vehicles, boats, art, jewelry, etc.), shares in U.S. corporations, U.S. debt obligations (government bonds, receivables from a U.S. person or company, etc.), and U.S. intangible properties (contractual rights, trust interests, patents, trademarks, and so on)5.
Consider This Hypothetical Scenario
Desi, 58, and Grace, 56, are Chinese citizens living in the U.S. They have no intention of remaining permanently in America, but the couple recently purchased a home in California for the benefit of their two children, who intend to reside permanently in the U.S. In addition to the California property, Desi and Grace have significant real estate holdings and financial assets in China.
Their total assets are as follows:
- Real property (China): $25 million
- Cash and investments (China): $8 million
- Los Angeles home (U.S.): $3.5 million
• Investment portfolio (U.S. equities): $2.2 million - U.S. personal property (furnishings, vehicles, jewelry): $300,000
- U.S. bank deposits (cash and CDs): $500,000
The U.S. situs assets are Desi’s separate property. Note that the $500,000 in a U.S. financial institution is not considered U.S. situs property for estate tax purposes.
Desi’s desire is that following his death, the Los Angeles home and the U.S. personal property will pass equally to his children and the remaining U.S. situs asset (the $2.2 million portfolio) will pass to Grace.
Issues/Concerns
Desi and Grace are concerned that the U.S. situs assets are subject to U.S. estate tax. Desi will not have the benefit of the $5.45 million lifetime estate tax exclusion amount; therefore, the assets (the Los Angeles home and personal property) that will pass to the couple’s children will carry an estate tax obligation at a 40 percent rate.
Furthermore, Grace will not get the benefit of the unlimited marital deduction for any assets she receives from Desi. (That’s because a U.S. citizen surviving spouse is entitled to an unlimited marital deduction, but without specialized planning, a non-citizen spouse receives no deduction.) Thus, the U.S. situs asset that Grace inherits outright from her husband will carry with it an estate tax obligation at a 40 percent rate.*
Option 1: Without Advanced Planning (at Desi’s death)
- Total U.S. situs assets: $6 million
- Available estate exemption: $60,000 ($13,000 credit equivalent)
- Potential U.S. estate tax liability (40 percent): $2,387,000
- Net U.S. situs assets after estate tax: $3,613,000
Option 2: With GUL
As proceeds from life insurance issued by a U.S. life insurance carrier on the life of a nonresident decedent are not subject to U.S. estate taxes – and this exclusion applies even when the policy is directly owned by the nonresident decedent – Desi can own a GUL insurance policy individually and name Grace and/or the children as beneficiary.
Results/benefits:
- Desi to buy life insurance policy with guaranteed death benefit of $3 million
- Annual premium to be paid by Desi: $44,067**
- At Desi’s passing, $3 million is available to offset estate tax liability of $2,387,000
- Net U.S. situs property before life insurance purchase: $3,613,000
- Net U.S. situs property after life insurance purchase: $6,613,000 (following Desi’s death)
Keep in mind that for multicultural clients such as Desi and Grace, the role of financial professionals typically is crucial. Consider the buying preferences of the Chinese-American community, specifically. Three of four Chinese-Americans prefer to buy life insurance through face-to-face meetings with financial professionals6.
However, distribution channel isn’t the only important factor. Carrier matters, too. According to the LIMRA report, “Brand recognition and referrals are very important characteristics that Chinese-Americans look at. These influence their choice of company, as well as the financial professional.7”
The Bottom Line
When seeking to leverage life insurance to address the needs of foreign nationals, evaluate carefully the carrier or two with which you might partner. Look toward one that has deep roots and respect in the multicultural community, along with an updated GUL offering.
By considering solutions and their sources, you just may identify the best approach for the particular needs of your clients. Even if their goals don’t include leaving a legacy sufficient to bankroll a trip to Mars for their beneficiaries, they will likely appreciate prudent planning and products. ◊
*Specialized planning is available to Grace wherein the estate tax can be delayed until her death; this requires the assets to be held in a qualified domestic trust (QDOT) for her benefit.
**Based on a Secure Lifetime GUL 3 policy for a male, age 58, Preferred Non-tobacco, no-lapse guarantee premium for $3 million level death benefit, guaranteed to age 121.
The discussion above is a hypothetical representation for illustrative purposes only. The Company, its financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your situation, consult your professional attorney, tax advisor or accountant.
Endnotes
1. “Projections of the Size and Composition of the U.S. Population: 2014 to 2060;” U.S. Census Bureau; March 2015; accessed Feb. 20, 2016 at http://www.census.gov/content/dam/Census/library/publications/2015/demo/p25-1143.pdf
2. Ibid.
3. “Modern Immigration Wave Brings 59 Million to U.S., Driving Population Growth and Change Through 2065: Views of Immigration’s Impact on U.S. Society Mixed;” Pew Research Center; Sept. 28, 2015; accessed Feb. 20, 2016 at http://www.pewhispanic.org/files/2015/09/2015-09-28_modern-immigration-wave_REPORT.pdf
4. Nilufer Ahmed, Ph.D.; Understanding the Chinese-American Market; LIMRA; 2015; accessed Feb. 20, 2016 at http://www.limra.com
5. Tim Cestnick; “Estate Tax: Uncle Sam wants that too;” The Globe and Mail; last updated Sept. 10, 2012; accessed Feb. 20, 2016 at http://www.theglobeandmail.com/globe-investor/personal-finance/estate-tax-uncle-sam-wants-that-too/article622489
6. Nilufer Ahmed, Ph.D.; Understanding the Chinese-American Market; LIMRA; 2015; accessed Feb. 20, 2016 at http://www.limra.com
7. Ibid.
