Insurance Dedicated Funds Offer Hedge Fund Exposure Plus Tax, Underwriting and Asset Protection Advantages for Investors
Hedge Fund Law Report
Variable universal life insurance enables policy purchasers to invest the cash values of their policies in different investment products. A primary benefit of such policies (in addition to the insurance) is that the income the investments generate can grow tax-free, and the death benefit on the policy is not subject to income or capital gains tax. Because those investments are considered securities, most offerings of variable life insurance are registered with federal and state securities regulators. Private placement life insurance is variable life insurance that, as its name suggests, is only offered through private placements to sophisticated investors. Purchasers of private placement life insurance can get exposure to hedge funds through funds known as “insurance dedicated funds” (IDFs). Because these IDFs may provide tax benefits for investors, they present an opportunity for managers willing to organize such funds to raise capital from investors desiring tax-efficient strategies. However, managers aiming to organize IDFs face some strategy and liquidity constraints and must be sensitive to other structuring considerations. To help managers understand IDFs, Kleinberg, Kaplan, Wolff & Cohen, P.C. recently hosted a webinar that provided an overview of the structure of IDFs, their benefits to investors and the requirements for setting up IDFs and assuring favorable treatment. This article summarizes the key take-aways from that discussion.