Life Insurance and Annuity Planning for Non-Resident Aliens


Many non resident  aliens (NRAs) own U.S. life insurance, i.e. life insurance issued by a life insurer domiciled in the United States. Why is this case? A range of planning reasons explain how this came to be.

If you believe the cliché dealing with the life insurance industry that life insurance is “sold” and not bought, it will help put the marketing and sales aspect of this situation into perspective. I lived in Miami for a decade and am personally aware of the large amounts of life insurance being sold to NRAs by U.S.-based agents. In many cases, the U.S. life insurance agents are from the same country and social circles as the NRA. Many former private bankers with key client relationships became very successful life insurance agents in Miami.

The purchase of U.S.  life insurance by NRAs is rooted in sound financial planning contrary to the notion that life insurance is “sold” instead of “bought”.

(1) Privacy and Confidentiality

In many cases, the NRA is unwilling to disclose his personal income and financial statement with a local life insurance agent and life insurance company as part of the financial underwriting. These disclosures could create serious security risks to the NRA and his family. The NRA and his family could become a target for kidnapping. In many cases (particularly in Latin America) the professional service providers with intimate knowledge of the client’s situation reside outside of the home country.

(2) Legal

Many civil law countries have forced heirship rules.  Life insurance is an excellent  planning tool for legally creating an estate distribution scheme that is more flexible than the dealing with the forced heirship rules in a civil law jurisdiction.

(3) Economic

The U.S. in spite of its current economic crisis is still seen as the political and economic safe haven for most of the World. Many high net worth individuals around the world have a residence in the U.S. in the event that the political and economic environment in their own home country becomes untenable.  The U.S. dollar still remains  the international currency for most of the World.

(4) Financial

Many countries lack a developed private retirement system beyond the social security system of the home country. In many cases, contributions and benefits in the local social security system are limited and denominated in the local currency. A permanent life insurance contract issued by a U.S. life insurer can serve as the functional equivalent of a qualified retirement plan denominated in a more stable currency- the U.S. dollar.

Frequently, NRAs have little confidence in the local life insurance industry even if the company is a subsidiary of a much larger global life insurer. On another level, the pricing and product competitiveness of permanent life insurance in the U.S. far exceeds the rest of the world. Pricing assumptions from mortality assumptions to product features favor the U.S. life insurance industry.

This article will also focus on how the tax assumptions may also favor the NRA in the purchase of life insurance issued by a U.S. life insurer.

Tax Review

An NRA is subject to U.S. estate taxes on his U.S. situs property. The current exemption equivalent for NRAs is $60,000. Life insurance is considered intangible personal property that is considered non-U.S. situs property for federal estate tax purposes. The proceeds of life insurance on the life of the NRA decedent are not subject to federal estate taxes. However, if the NRA dies owning life insurance on the life of another person, the value of the policy at death is included in the NRA’s estate.

From a U.S. income tax perspective, the policy enjoys the tax advantages of any other permanent life insurance policy – (1) Tax-free buildup of cash value (2) Income tax-free death benefit (3) The ability to access the cash value during lifetime through the partial surrender of the cash value and tax-free policy loans.

The rules dealing with annuities are far less generous from an estate tax perspective. Unlike life insurance issued by a U.S. carrier, an annuity issued by a U.S. life insurer is considered U.S. situs property for federal estate tax perspectives. The income tax treatment of annuity payments for a NRA provides for a 30 percent withholding tax under IRC Sec 871(a) unless a tax treaty provides for more favorable tax treatment. Fortunately, the majority of tax treaties with the U.S. provide that annuities are not subject to U.S. income and withholding taxes. Nevertheless, the federal estate tax remains a problem.

It is likely that many NRAs own fixed or variable annuities issued by a U.S. life insurer. Since the estate tax threshold is so low for the NRA ($60,000), the NRA should consider a tax-free exchange under IRC Sec 1035 to an annuity issued by an offshore life insurer to eliminate the estate tax exposure. Several offshore life insurers issue annuities that are U.S. tax compliant if that is the choice of the policyholder.

Planning Considerations 

One of important underwriting considerations for a U.S. life insurer underwriting a policy on a NRA is the NRA’s connection to the U.S. From an underwriting standpoint, the life insurer will often require the proposed insured (the NRA) to have a substantial connection to the U.S. such as owning a home or a business. The life insurer will also require that premium payments be made from a U.S. bank account. The U.S. life insured is not an admitted carrier in the NRA’s country and cannot legally issue a policy directly with any solicitation in the home country.

Another important consideration is that some foreign jurisdictions have laws prohibiting the NRA from purchasing foreign life insurance. These rules can be legally circumvented by removing the transaction from the home jurisdiction. Generally, these rules for the NRA are not applicable if all of the elements of the insurance transaction are completed outside of the home country – (1) Medical underwriting (2) Application process (3) Premium payment (4) Policy delivery.

While many states exempt life insurance from the claims of the policyholder’s creditors, this rule is not universal. As a result, trust planning is advisable.  The NRA may establish a domestic irrevocable life insurance trust (ILIT) or alternatively, an offshore ILIT may be used. The NRA may need to purchase the policy and transfer it to the offshore ILIT. The transfer is not subject to gift taxation or the three year rule under IRC Sec 2035(d) which would provide for estate tax inclusion if the insured died within three years of the transfer.

In the case of an annuity, the NRA should do a 1035 exchange to an offshore annuity to avoid estate tax inclusion. 


I am certain that large amounts of life insurance issued by U.S. carriers have been sold to NRAs. I am less confident regarding tghe degree of tax planning that may have accompanied the purchase.

Not much has been written regarding planning for NRAs with respect to life insurance and annuity planning. The blog post is a quick summary of the tax rules with some basic planning. Life insurance from an investment and tax planning perspective makes great planning sense for NRAs. The tax planning surrounding the purchase is of equal importance.







About gerrynowotny

I am a tax and estate planning attorney with a JD and LL.M in estate planning from the Univesity of Miami School of Law. I have worked in the life insurance industry for twenty three years and the last eleven in private placement life insurance.
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14 Responses to Life Insurance and Annuity Planning for Non-Resident Aliens

  1. Hello , I am a consultant with and would like to do joint work with you.

    • gerrynowotny says:


      Hope that you are doing well. I am getting ready to write a tax blog on the benefits of retirement plans for non-resident aliens with respect to their U.S. activities.

  2. Miguel says:

    Hello. I am unaware of companies that openly sell life insurance to NRA’s. I am an independent broker with many potential clients. Do you have any references?

  3. I know this if off topic but I’m looking into starting my own blog and was curious what all is needed to get setup? I’m assuming having a blog like
    yours would cost a pretty penny? I’m not very web smart so I’m not
    100% positive. Any suggestions or advice would be greatly appreciated.

  4. Wow, this article is nice, my sister is analyzing these kinds of things, so
    I am going to let know her.

  5. Britt says:

    You can definitely see your expertise in the work you write.
    The world hopes for even more passionate writers like you who are not afraid to mention how
    they believe. At all times go after your heart.

  6. David S. says:

    Hi – You address the withholding tax applicable to annuity payments to NRAs and how tax treaties can reduce the withholding in many cases. What about where an NRA redeems a life insurance policy that has increased in value? It seems clear the increase in value would generally be subject to withholding taxes at a rate of 30%, but is this amount reduced by any tax treaties? For example, the U.S.-Mexico tax treaty exempts annuity payments made to NRA Mexicans from U.S. withholding tax but makes no mention of life insurance. Does this mean any gain in the redemption of a life insurance policy for cash value by an NRA Mexican resident would be subject to 30% withholding?

    • gerrynowotny says:


      A policy that is U.S. tax qualified would not be taxable under the inside build up under IRC Sec 7702 – tax law definition of life insurance. Policy loan would not be taxable unless it is a MEC. Death benefit non taxable. Partial surrender to basis – no. Complete surrender – interesting question but probably not annuity income.

  7. hong says:

    Hi, I am a Chinese national residing in the U.S. I came across this article when I googled annuity and non resident aliens. There are reasons for a foreign national to buy US financial products. Can I contact you sometime?

    • gerrynowotny says:


      This is an excellent albeit not so well known strategy for Chinese Nationals particulary with investments in hard assets – real estate, private equity, MLPs, oil and gas etc. the legal authority is clear and straight forward. I would be happy to answer any questions that you might have.


      Law Office of Gerald R. Nowotny
      266 Lovely Street
      Avon, CT 06001

      Office: (860) 404-9401
      Cell: (860) 490-9689
      Fax: (860) 540-1880
      Skype: gerrynowotny

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