There are certain significant tax and planning advantages in having an offshore insurance policy. For tax purposes, an offshore policy and a domestic policy must meet the same rules. That is, there is nothing available offshore that cannot be available onshore in terms of insurance product design. However, offshore insurance companies do have policies available, which meet the US rules, but are not offered by US companies. Such policies allow the policy owner to utilize the services of one or more independent investment advisors.

The tax code specifically provides that the use of an independent investment advisor shall not be prohibited. This flexibility allows the independent advisor to have investments in both public-type investments as well as private-type investments. In other words, the investments are not required to be restricted to mutual funds offered by an insurance company.

Additionally, offshore insurance policies offer a level of security not available domestically. In the Cayman Islands, for example, the underlying insurance law provides that assets held in the segregated asset accounts of an insurance company will not be subject to the claims of the insurance company's creditors. Assets held in these segregated asset accounts can only be paid to the policy owner in the event of the liquidation of the insurance company.

In the case of a domestic policy, the policy owner is an unsecured creditor of the insurance company and must therefore rely on the financial solvency of the insurance company in order to be assured of the policy benefit being paid off at death. This risk, which is significant, is avoidable in an insurance policy, which has been issued offshore under the right insurance law.

Finally, as a practical matter, an offshore policy gives a high level of asset protection for the assets held under the policy. Most states provide for some amount of protection for life insurance proceeds, but not fully. Some states, such as Florida, have laws, which may expose insurance policies to a lawsuit making them available to creditors.

For example, while Florida exempts life insurance proceeds and cash surrender value, there have been cases where the acquisition of insurance was held to be a fraudulent conveyance even though the proceeds are exempt. By acquiring an offshore policy, it is possible to gain a much higher level of real wealth protection. In a world with plenty of uncertainty, there is no sense taking avoidable risks.

While trusts have been the predominant legal arrangement for owning insurance, a trust is by no means the only vehicle. A partnership or a limited liability company may be even better as an ownership vehicle. One of the significant disadvantages of the insurance trust is that the insured may not for tax reasons be the trustee of the trust, which owns the insurance policy on his or her life.

For tax purposes, where a partnership owns an insurance policy on a partner's life and receives the insurance proceeds upon that partner's death, it is not likely that the proceeds will be received as income to the partnership or any of the remaining partners. However, the basis of each partner's interest in the partnership will be increased as a result of that partnership's receipt of the insurance proceeds covering the deceased partner's life. These are extremely interesting tax attributes, particularly for obtaining flexibility in planning.

Recent developments in US tax law also allow limited liability companies to be easily treated as partnerships under the check-the-box rules. ith some offshore jurisdictions providing special or heightened creditor protection for limited liability companies, the use of an LLC--which for US tax purposes, is treated as a partnership--becomes an outstanding insurance planning platform.

While the life insurance trust has significant restraints and limitations, such as irrevocability, a limited liability company structure is a flexible arrangement and allows changes to be made in the future that were not contemplated when the policy of insurance was first acquired.

As a further refinement, an insurance limited partnership or LLC can be utilized as part of a plan to be funded by monies set aside in an IRA. In this way, insurance may be acquired using pre-tax dollars.

The important point to note is that insurance is not only a valuable financial product, but there are a number of legal entities that can be used offshore to serve as insurance policy-holding structures.

Modern estate planning is designed both to meet present known concerns and to provide the flexibility to adapt to future contingencies. Regardless of the point in time, there will be needs for cash to meet financial requirements - taxes, debts, income replacement to name but a few.

Insurance as a financial product is in a unique position to meet these real life financial needs. When using offshore insurance in offshore holding vehicles, this important financial product becomes an even more powerful planning tool.