As Neil Diamond once sang, "they're coming to America!" The “they” for purposes of this blog post being HNW individuals from foreign countries and their investment dollars.
According to one recent study, net inflows of HNW individuals into the United States are expected to exceed 3,500 in 2024 (compared to just over 2,200 that moved to the country in 2023). Furthermore, the U.S. Commerce Department recently announced that 2023 was the 12th straight year the United States led the world in foreign direct investment.
That migration and investment means one thing - planning. And when you talk about planning, you need to talk about life insurance.
For foreign nationals—those who are neither U.S. citizens nor permanent residents—the allure of U.S. life insurance products lies in their unparalleled stability, diverse offerings, and potential tax advantages.
When leveraged strategically, these products can serve as cornerstone components in pre-immigration planning, estate planning, and broader wealth management strategies.
The Appeal of U.S. Life Insurance for Foreign Nationals
The U.S. life insurance market is one of the most robust and sophisticated globally, offering myriad products that cater to diverse financial objectives. For foreign nationals, the U.S. life insurance landscape presents several compelling advantages:
Stable Financial and Regulatory Environment: The U.S. financial system is renowned for its rigorous regulatory framework and economic stability, making U.S. life insurance policies a secure vehicle for wealth preservation.
Diverse Suite of Products: The breadth of life insurance products available in the U.S. enables foreign nationals to tailor coverage to their specific financial goals, whether they prioritize protection, investment, or legacy planning. Foreign nationals are also able to purchase policies with larger face amounts than are available in their home countries.
Competitive Pricing: The size and competitive nature of the U.S. life insurance market often result in more favorable premium rates compared to those available in other jurisdictions, offering cost-efficient solutions for comprehensive coverage.
Favorable Tax Treatment: U.S. life insurance policies offer distinct tax advantages, including tax-deferred growth of cash value and tax-exempt death benefits. These features are particularly advantageous in the context of estate planning and intergenerational wealth transfer.
Pre-Immigration Planning with U.S. Life Insurance
For foreign nationals on the cusp of relocating to the United States, pre-immigration planning is an essential exercise in financial foresight. U.S. life insurance can play an instrumental role in this process, addressing key concerns that arise during the transition:
Estate Tax Mitigation: Upon acquiring U.S. residency, foreign nationals become subject to U.S. estate taxes on their worldwide assets. By securing life insurance coverage prior to immigration, individuals can create a death benefit that provides liquidity to cover potential estate taxes, thus preserving other assets for their heirs.
Securing Insurability: The ability to obtain life insurance is contingent upon one's health status, which can deteriorate over time. By purchasing a policy before immigrating, foreign nationals can lock in coverage at more favorable rates, safeguarding against the risk of future insurability challenges.
Wealth Preservation: In the unfortunate event of premature death, life insurance ensures that a financial safety net is in place for the family. This is especially crucial for individuals with significant assets in their home country, where those assets may be subject to foreign taxation or other risks once U.S. residency is established.
Estate Planning and Cross-Border Wealth Transfer for Foreign Nationals
Estate planning is a complex yet critical undertaking for foreign nationals, particularly those with substantial cross-border assets. U.S. life insurance offers unique tools that can be effectively employed to manage estate tax liabilities and ensure the efficient transfer of wealth to future generations.
Estate Tax Planning: U.S. estate taxes can significantly diminish the value of an estate, leaving less for heirs. For those not domiciled in the United States, the exemption available against the value of assets includible in a U.S. taxable estate is only $60,000. Life insurance provides an income tax-free death benefit that can be used to offset estate tax liabilities, thus preserving the estate's value for beneficiaries.
Trust Funding Mechanisms: Life insurance can be an effective means of funding trusts, which are often used to control the distribution of assets and minimize tax exposure.
Asset Protection: In addition to the protection offered via trusts, many U.S. states also offer protection from creditors for life insurance, ensuring that when it is used as part of estate planning, planning objectives are met. Furthermore, when owned in a U.S. trust, the policy is subject to Foreign Account Tax Compliance ACT (FACTA) reporting, meaning the existence of the policy might not be reported to the individual’s home country.
Facilitating Cross-Border Wealth Transfer: Foreign nationals frequently possess assets in multiple countries, complicating the transfer of wealth upon death. A U.S. life insurance policy can provide immediate liquidity, enabling heirs to manage estate matters in various jurisdictions without resorting to the sale of other assets.
Countries with an inheritance or gift tax. Source: EY Worldwide Estate and Inheritance Tax Guide 2024
Key Considerations for Foreign Nationals Purchasing U.S. Life Insurance
While U.S. life insurance presents numerous benefits for foreign nationals, it is essential to be aware of certain considerations that can impact the purchase and management of these policies:
Stringent Underwriting Criteria: Foreign nationals may encounter more rigorous underwriting standards, including the need to demonstrate substantial ties to the U.S., such as property ownership or business interests, and additional medical evaluations. While in the past, foreign nationals had to come to the United States for their medical exams, carriers are beginning to change this requirement and permitting exams in foreign countries, such as Hong Kong or the United Kingdom, in certain circumstances.
Currency Exchange Risks: As premiums and benefits are typically denominated in U.S. dollars, foreign nationals should carefully consider the potential impact of currency fluctuations on their policy's value. Some policies offer riders or options to hedge against currency risk, providing additional financial security.
Legal and Tax Complexity: The legal and tax implications of holding a U.S. life insurance policy can vary significantly depending on an individual's country of origin, current residency, and future plans. Consulting with legal and tax professionals who have expertise in cross-border issues is crucial for ensuring compliance and optimizing the benefits of the policy.
A Strategic Asset for Financial Security and Legacy Planning
For foreign nationals, U.S. life insurance can be a pivotal component of a well-rounded financial strategy, offering protection, stability, and a pathway to achieving long-term financial goals. Whether used for pre-immigration planning, estate planning, or as part of a broader wealth management approach, U.S. life insurance products provide a range of benefits that can help secure one’s financial future and ensure the orderly transfer of wealth across generations. By partnering with seasoned professionals who understand the nuances of the U.S. insurance market and cross-border financial planning, foreign nationals can effectively navigate this complex landscape and make informed decisions that align with their unique financial objectives.
At Robin Glen, we use our expertise in income and estate tax, private capital, and insurance analysis and design to create unique solutions that deliver impactful results for our clients and advisor partners.
If you or your client have questions about how U.S. life insurance can play a role in the planning for foreign nationals, reach out. We can help.
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