In 1997, I came across a wealth planning concept that instantly intrigued me. It was in the context of research I was conducting for a client, in my role as a member of the board of directors of BFI Consulting Ltd. At the time, I still worked as a management consultant with Price Waterhouse. However, a concept termed “private banking insurance” or “insurance wrapper” had caught my attention.
The concept, in simple terms, presented an opportunity for US taxpayers to “wrap” a personally tailored and professionally managed investment portfolio in a life insurance policy or deferred variable annuity, thus accruing the investment gains tax-free, and depending on the specifics of the structure, passing the assets on to the designated beneficiaries, separate of probate, and tax-free as well. The concept, therefore, has become well-known also as “insurance wrappers”.
This sounded interesting. But, life insurance was, for some reason, not really a concept that instantly turned me on. I think I’m no different to most people in that respect.
However, that changed when I found a well-written and capturing article titled ‘The Hampton Freeze, International life insurance planning at its best’, written by Prof. Craig D. Hampton, and published in Offshore Investment, October 1994.
And thus was born the Hampton Freeze
Here is how the article starts: “I was visiting a gentleman at his home in the Piccadilly district of London. It was explained to me that his net worth exceeded US$100 million by a substantial margin. I noticed the presence of a computer terminal on a large desk in his den. It was surrounded by reams of paper dealing with offshore investing.
“It soon became apparent that his affluence was due to his own efforts when he said to me: “You’re a bright young man who obviously knows his craft. But what can you tell me that I don’t already know about finances?”
“I leaned forward and made this simple statement: “Through the creative use of international life insurance, your financial affairs can be arranged so that you will never have to pay income taxes for the rest of your life!” The gentleman took serious notice, and thus was born The Hampton Freeze.”
Well, I took serious notice too. In fact, after reading the entire article, I was captured and researched the topic in-depth. I met with Prof. Hampton, who at the time lived in the Bahamas, and had the privilege of learning from him first-hand the concept of what today is generally termed private placement life insurance (PPLI).
Limited Cash Value Policies
In 1998, I took over the lead at BFI Consulting Ltd. and have since expanded the company, which was initially focused primarily on offshore asset protection and wealth preservation strategies, including the renowned Swiss Annuity. Today, BFI Capital Group Ltd. consists of a number of companies and entails a variety of wealth management services that, in their sum, still focus on asset protection and wealth preservation. However, we’ve also extended our services into the realms of portfolio management and precious metals.
PPLI to this day, is an important tool in our offering. Over the years, many of our clients have employed this tool, which beyond the tax benefits, effectively integrates the benefits of legal asset protection, global investment flexibility, privacy and generational planning features.
While I am not aware of any insurance carrier, today, offering a PPLI policy called the Hampton Freeze, Prof. Hampton’s concept has certainly lived on. Since his article in 1994, a series of products has been created by the industry. These policies are generally referred to as limited cash value policies. The most commonly used product is called a Frozen Cash Value policy. So, the “Freeze” has lived on at least partially.
“The Freeze” works if you’re too rich, too old, or not in good health
I found Prof. Hampton’s article on a pile of paper as I was cleaning up a bit, as I should do more often, toward the end of last year. As I flew over the article, I again was captured by the brilliance of the idea and concept.
And, what’s most intriguing about it: It’s valid to this day! While most other effective offshore income tax planning tools have gone to the wayside over the past years, the Freeze, and the concept presented in Prof. Hampton’s article, still works.
You may now wonder how the Freeze works. I recommend you read the article. In brief, it is based on the US tax code (‘the Code’) and its articles relating to life insurance, primarily in section 7702. While ordinary PPLI policies will have their limitations when it comes to insured persons that are too old or in bad health, and no common products will be available for very large premiums, the Hampton Freeze does not know such limitations.
Let me explain in brief, without boring you with technicalities. The Code defines a number of actuarial rules regarding the cash value and the face amount of life insurance policies. They must meet certain minimum risk coverage (death benefit) levels in order to be tax-compliant.
Therefore, based on actuarial best practices and the limitations of re-insurance levels available internationally, you will not have access to the tax freedom offered if you’re too rich. In other words, the limitations of re-insurance are, internationally, at a level of roughly US$ 40 to US$50 million of life risk. If you’re premium is too high, you will not be able get a policy. In order to keep within the actuarial tests defined by the Code, there will not be enough re-insurance available. Thus, no policy. Equally, you will not have access to the tax freedom of PPLI if you’re in bad health. You will fail at the medical. And, you are locked out of the world of PPLI if you are too old.
The Hampton Freeze removed those limitations. Thus, the largest policies written today frequently make use of the limited cash value concept born in 1994. We too regularly make use of this planning tool. My utmost respect and gratitude to you Prof. Hampton! Good work indeed!
If you would like to learn more on “The Freeze”, or PPLI in general, download our PPLI Booklet.
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