We have been asked countless times why we created Castle Re.
It is a great question and one that deserves an answer. We know exactly why we put Castle Re together. Articulating the same so everyone else understands why, however, is not such a simple matter. Let's start with why we chose Castle Re or as we prefer to call the company “CastleRE”. The RE stands for RE-inventing, RE-thinking and RE-focusing on how cash value life insurance should be used to constructively help the high net worth client do a far better job with his or her overall estate and financial planning. It is commonly understood that the product of life insurance is a mystery and a frustration for far too many people. It was time to re-think the entire issue of life insurance and find a way to eliminate that mystery and frustration so the vast potential of the concept of cash value life insurance could be used constructively to help high net worth clients do a far better job with their estate, business and financial planning. The legal and tax background of the principals behind CastleRE was instrumental in this process.
CastleRE was formed by two tax lawyers who collectively have over 50 years of tax law experience. Much of that experience has dealt with life insurance, both international and domestic, and with estate and business planning also both international and domestic. Rather than write up a traditional Mission Statement we decided a simple Q&A format would be more helpful. So we are going to ask ourselves four questions. We hope our answers will help you to understand the purpose behind CastleRE.
Pete Moison, JD, TEP
Q: Do you see life insurance as a policy that must be sold to the public?
No. As a matter of fact that was a source of great frustration while practicing law. Attorneys do not sell products. Rather they sell a service. The service is to listen carefully to the client, ask questions, and develop a specific plan to help the client. The plan must be consistent with the client’s objectives and be specifically designed for the client. If the client agrees the plan solves his or her objectives then the attorney and the professional advisory team goes to work to prepare the contracts, wills, trusts, and other documents necessary to finalize the plan. The contracts and documents used must be specifically designed and drafted to meet the client’s unique objectives. When it came to life insurance the client was forced to buy a life insurance policy. We had no control over the content or design of the policy, its costs or benefits.
To be most helpful to the client we needed more control over the terms of the life insurance contract including pricing, the design of the death benefit, the reserve, and some of the black and white of the contract language. The insurance companies would not yield on these issues. To be fair insurance companies in the U.S. are subject to a vast amount of regulation. However, at its core a life insurance policy is just a contract and it is a contract that can be drafted to meet the specific needs of each client.
Q: How do you take the mystery out of cash value life insurance?
By first asking the client and the client’s advisor to forget everything they know or think they know about cash value life insurance and start with a clean slate. This includes trying to eliminate any prejudice they have towards life insurance. We know we are asking a lot by doing this. But is necessary. There are really only 3 components to a life insurance contract: the overhead cost to the insurance company; the cost to insure the risk; and the reserve or cash value investment component. That is it. Not much mystery there. The first two items (the overhead and risk cost) can be guaranteed. Further the overhead cost can and should be a negotiated and fully disclosed and transparent item. With respect to the risk cost that cost should also be very transparent. As a company we do not believe a profit factor should be built into the risk component. That leaves the investment component. We maintain if the cost components of the insurance contract can be guaranteed then the design of the investment component can and should be much more effective and efficient. What is little known is the investment part can be delegated to an independent investment manager.
Q. When do you need the death benefit of life insurance?
That is one of those questions where the answer depends on why the advisor has recommended life insurance to be part of the plan. In simple terms, however, if the client can qualify for life insurance then it is a pretty safe bet the client is going to live a long time. An insurance company is not going to take on the risk if it likely the client is going to die anytime soon. Given odds are extremely good the client is going to live a long time then the design of the insurance contract probably should be one that delivers the maximum death benefit when the client needs it the most—late in life.
Q. What do you see as the role of CastleRE?
In simple terms CastleRE is a custom manufacturer of life insurance contracts. CastleRE does not sell life insurance policies. Rather it works with the professional advisors to help custom design, draft and implement tax compliant contracts of life insurance. If we are going to be true to our purpose then we cannot operate using static policy forms. We must be able to help the professional advisor design and execute a life insurance contract that is consistent with the advisor’s advice and solves the client’s planning objectives. Our Bermuda location allows for this luxury.
Q. Why Bermuda and what is the U.S. tax impact?
Bermuda is the third largest insurance jurisdiction is the world. Its laws are excellent, has a tremendous pool of professional talent, and the regulation is focused on company solvency and not on a static one size fits all policy form. This allows CastleRE to be able to custom design and implement each custom life insurance contract or CLIC. We located in Bermuda for these reasons. The Bermuda location also allows the company to help international clients as well. From a tax standpoint, however, CastleRE is treated as a U.S. life insurance company. CastleRE filed a 953(d) election with the IRS and files a U.S. income tax return. The 953(d) election means, among other things, that no federal excise tax is charged against premiums paid into a CastleRE life insurance contract.
Being in Bermuda means the client has a safe jurisdiction, a jurisdiction that allows for custom contract work, and the 953(d) election means we operate in a manner compliant with the Internal Revenue Code. We want a successful outcome for every client.