Life Insurance
The United States has seen a continuous rise in its foreign-born population since 1970, both in absolute numbers and as a proportion of the total population. Notably, about 18 million children under 18 in the U.S. live with at least one immigrant parent, accounting for 26% of the total child population*. This demographic shift presents unique financial planning challenges and opportunities for non-U.S. residents and foreign nationals.
As people from other countries relocate to the U.S. for work or residence, they face distinct financial hurdles. However, these challenges also bring opportunities for tailored financial solutions. This guide aims to provide a deep understanding of these challenges and the corresponding opportunities within the foreign national market. Specifically, it addresses two main groups of foreign nationals, their financial issues, and how life insurance can serve as a potential solution. Additionally, it outlines the guidelines and processes for assisting these groups in achieving their financial goals.
Understanding Foreign Nationals and Their Challenges
Foreign nationals in the U.S. can broadly be classified into two groups: nonresident aliens and resident aliens.
Similarities in Financial Needs
Both nonresident aliens and resident aliens share similar life insurance needs, akin to those of U.S. citizens. These include:
Income Replacement: Ensuring that dependents have financial support in the event of the insured’s death.
Salary Continuation: Providing a steady income stream for families who rely on the insured's earnings.
Legacy for Heirs: Creating a financial legacy for the next generation.
College Funding for Dependents: Securing educational funds for children.
Debt Cancellation: Clearing any outstanding debts to avoid burdening survivors.
Liquidity for Estate Tax Liabilities: Providing cash to cover estate taxes and other expenses.
Differences in Financial Perspectives
Despite these similarities, significant differences exist among foreign nationals, particularly in their attitudes towards financial services and life insurance. Cultural familiarity and acceptance of life insurance can vary widely. For instance, some cultures readily embrace life insurance as a wealth protection strategy, while others may be less aware of its benefits. Additionally, the status of nonresident or resident alien brings distinct economic factors, risks, and tax concerns.
Nonresident Aliens: Financial and Tax Implications
Nonresident aliens are individuals who are neither U.S. citizens nor domiciled in the U.S. They may, however, own properties, businesses, or other investments in the U.S., creating meaningful financial challenges such as potential federal estate taxation.
Economic Risks
High-net-worth and affluent nonresident aliens are typically aware of the economic risks in their home countries and the corresponding currency fluctuations. They might also be familiar with the capacity, product, or claim limits of their local life insurance carriers.
Tax Concerns
U.S. assets owned by nonresident aliens, such as bank accounts, homes, cars, or other investments, could be subject to U.S. transfer taxes. These taxes are significantly harsher on nonresident aliens compared to U.S. citizens and resident aliens.
Resident Aliens: Financial and Tax Implications
Resident aliens are individuals who live and are domiciled in the U.S. but are not U.S. citizens. They likely own assets both in the U.S. and in their birth country, which may be subject to U.S. federal estate tax.
Navigating U.S. Taxes for Non-U.S. Residents
The U.S. tax system employs different tests to determine residency for income, estate, and gift tax purposes.
U.S. Income Tax
Non-U.S. citizens who meet specific residency criteria will be taxed similarly to U.S. citizens.
Substantial Presence Test**: Under U.S. income tax law, a person is considered a resident alien if they are substantially present in the country. This is determined by:
Being in the U.S. for at least 183 days over a three-year period, including:
All the days present in the current year,
1/3 of the days present in the previous year,
1/6 of the days present two years before.
Exceptions exist for certain exempt individuals, such as foreign government-related personnel, teachers, students, athletes, and those unable to leave due to medical issues. Additionally, non-U.S. citizens maintaining a tax home in a foreign country, staying in the U.S. for fewer than 183 days, and having a closer connection to the foreign country may be exempt.
U.S. Estate and Gift Tax***
Estate tax rules differ considerably from income tax rules, with domicile playing a critical role in determining tax liability. A non-U.S. citizen is considered a U.S. resident for federal estate tax purposes if they are domiciled in the U.S.
The Exclusion Amount for Non-Residents: One of the first points to note is the exclusion amount—the threshold above which estate taxes are levied. For U.S. citizens and residents, this amount is quite generous, often adjusted for inflation (c. $13.6 million in 2024). However, for foreign non-resident investors, the exclusion amount is significantly lower, set at just $60,000. This means U.S.-situated assets exceeding this value at the time of death are subject to estate taxes.
Domicile: Defined as the place where an individual lives with no intention of moving elsewhere. This subjective test is determined by examining objective factors such as the size, nature, and location of residences, voting registration, place of business, and other personal records.
Nonresident aliens are subject to federal estate and gift taxes on U.S. property but can avoid these taxes by not holding direct ownership of any U.S. property or business interests.
The Role of Life Insurance for Non-U.S. Residents
As nonresident aliens establish ties to the U.S., they encounter new financial challenges. U.S. life insurance policies can effectively address these challenges, offering benefits such as:
Exclusion of the death benefit from the nonresident alien’s U.S. gross estate, allowing loved ones to inherit without significant estate tax.
The death benefit is also passed to heirs without U.S. federal income tax.
Cash value within the policy accumulates on a tax-deferred basis and can be accessed income tax-free through loans and withdrawals.
Completing the Insurance Transaction
All aspects of the insurance transaction, including solicitation, application completion, medical examination, inspection, and contract delivery, must occur within the U.S. Adequate time should be allowed for the underwriting process and policy delivery.
Establishing Ties to the U.S.
The proposed insured must demonstrate significant ties to the U.S., such as:
U.S. citizenship
A spouse who is a U.S. citizen or resident
Ownership of U.S. real estate or a business
Verifiable U.S. tax liability or assets
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This material is being provided for informational purposes only, and does not take into account the investment objectives or financial situation of any client. The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. We do not provide tax, accounting, or legal advice. Clients should consult their own independent advisors as to any tax, accounting, or legal statements made herein.