Editor's Note: The following article is excerpted from Aviss's book, "Strategies for Protecting Wealth," published by McGraw-Hill.

Many conservative financial planners believe that the Swiss annuity is the single most effective way to diversify some of your capital out of the U.S. dollar and into Swiss francs. Americans investing in a Swiss annuity are acquiring protection by purchasing what may be the safest and most straightforward overseas investment available today.

Most international investors establish their Swiss annuities with a single premium deposit. On the other hand, other investors choose to dollar-cost-average these investments by making periodic deposits, and many make arrangements for these payments through a Swiss bank account.

However, you don't have to have a Swiss bank account to make your premium deposits. In fact, such an account would be reportable under U.S. law, thus removing one of the advantages of Swiss annuities. Instead, there is another way to make your premium deposits-through a premium deposit account.

This method has so many advantages it is surprising that so few people know about it. In effect, a premium deposit account is an interest-bearing "bank" account opened at your insurance company. It has two distinct advantages over a regular Swiss bank account.

First, it is not reportable to the tax authorities because you are making payments to an insurance company, not a bank. Second, it pays interest rates about 1% higher than bank deposit (savings) accounts. Moreover, there is no withholding tax on the interest; all payments are tax-free. Remember, when you send your money to Switzerland, it is immediately governed under some of the most consumer-oriented laws of asset protection and privacy in the world.

Versatile Options
Most people buy annuities so that they will have a constant source of income during retirement. The Swiss realize that the needs of people differ and so they have developed a variety of options for both single and joint annuities.

When you consider the various options Swiss annuities offer, there are several factors you should examine. First, you should consider your age and the age of your spouse when the income from your annuity is likely to begin. You must also consider the amount of the investment you are willing to make. Such factors will play a crucial role in the type of annuity you select.

Of all the factors you should examine, it is age that probably will have the greatest impact. The older an investor is, for example, the more income difference there will be between an annuity without refund and one with any of the beneficiary options. For example, should you purchase an annuity when you are 55, the difference in life income created under each option is not that much, because the life expectancy for both men and women at 55 exceeds 25 years. Based on life expectancy and payment rates, the insurance company will likely have to pay out the entire amount of the plan no matter what option the contract contains. Options will have different effects, based on age.

There are many options from which you may choose. Assessing your financial goals and situation is important. Asking yourself questions similar to the ones that follow can prove helpful:
1. Who is dependent upon my financial support?
2 What is the purpose of my buying an annuity?
3. How much money can I open the account with?
4. How much money can I invest monthly? Yearly?
5. When (based on current considerations and factors) do I plan to take funds out?
6. How (based on current considerations and factors) do I plan to take funds out?

Asking yourself such questions can lead you to your best options with an annuity. For example, if you wish to use the annuity to provide income for your spouse someday, then you would consider a plan that does in fact provide for that person. You might consider a joint annuity, a plan called "10 years certain, with refund," or you might decide on taking out single annuities, one for you and one for your spouse.

On the other hand, if you have no dependents, and are over 65, you may decide on a straight-life annuity that pays you the highest income for as long as you live. In this case there would be no need to leave any funds behind. After your death the insurance company would stop all payments. You would receive the highest income possible for the rest of your life, but there would be nothing for beneficiaries.

If you wish to provide for beneficiaries, you should consider annuities "with refund," or "ten, 15 (or any number) years certain." Each plan has special features.

"With refund" means that at the death of the policyholder, the unused portion of the premium paid is refunded to the beneficiary in a lump sum. The amount of the payment is calculated by subtracting the amount of income that was paid out from the original premium. After the final payout, the account is closed.

"Ten years certain" means the income is paid for a minimum of ten years. If the annuity owner dies after receiving only payments for three years, his or her beneficiary would receive the income for another seven years. The number of years is written into the contract at the time the annuity is bought. Thus, the purchaser can buy an annuity with an option of "ten years certain," "15 years certain," "25 years certain," or whatever he or she wishes.

Joint annuities work in the same way regarding payments. Assuming a ten-year certain contract-if one of the owners dies after receiving payments for three years, the other owner, or beneficiary, will receive payments for the remainder of the contract.

How Has The Swiss
Annuity Performed?
How much profit can be made with a Swiss annuity? Over the past decade, the increasing value of the Swiss franc alone puts you ahead of the U.S. inflation rate. When you add in the 4% to 5% annual return you earn each year in interest and profit sharing, you see that the Swiss franc is a super-conservative investment with a strong potential for delivering a higher yield due to the historical strength of the Swiss franc.

As noted, the best method for growing Swiss francs during the past 30 years was to place them in a Swiss annuity. Inside the annuity, money grows without any stock or bond market risk in a guaranteed, tax-advantaged account. This is entirely legal and is fully approved by the U.S. government.

A Swiss annuity gives you a twofold return: (1) the interest and dividends ("profit sharing," as the Swiss put it) paid into the annuity and (2) the appreciation of the Swiss franc. (Note: There is no guarantee, of course, that the Swiss franc will continue to grow in value against the dollar. Americans who want to invest in Swiss annuities without taking the currency risk can make and keep their investment in U.S. dollars.)

Keep these factors in mind: 1) Declining interest rates come with decreased inflation. Decreased Swiss inflation means the Swiss franc will appreciate, which means a greater return convertible in your own national currency; 2) Rising interest rates produce a higher investment yield for the insurance company and this can mean higher dividend payments to the policy owner.
This combination of annuity interest, profit sharing, and the appreciation of the Swiss franc would have provided an average annual return of nearly 9% since 1971. Almost one-half of that growth came from the appreciation of the Swiss franc against the U.S. paper dollar. Albert Einstein once said that the greatest mathematical principle in the universe was the power of compound interest.

Tax Considerations
Swiss Taxes
Although Swiss residents face a 2.5% stamp tax when purchasing a Swiss annuity, nonresidents (e.g., U.S. persons) will pay no Swiss tax on purchase or liquidation of the annuity. Swiss annuities are completely exempt from Swiss taxes for everyone residing outside Switzerland. This applies to income tax, as well as inheritance and estate taxes.

Moreover, unlike other authentic Swiss franc investments (bonds, stocks, Swiss bank accounts, etc.), they are not subject to the 35% Swiss withholding tax-a definite advantage over other sound Swiss franc investments.

No Excise Tax
Unlike many other foreign annuities, Swiss annuities are not subject to the 1% U.S. excise tax on the purchase of foreign annuity and insurance premiums. This is a by-product of the adoption in 1998 of a new Swiss-U.S. Double Tax Treaty and applies to premiums paid by a U.S. citizen to an insurance company domiciled in Switzerland.

U.S. Tax Issues
Swiss and foreign fixed annuity contracts issued since January 12, 2001 are no longer tax deferred in the United States (see Internal Revenue Service regulations, "Tax Treatment of Certain Annuity Contracts.")

A Swiss fixed annuity is a debt instrument, that is, a "promise to pay a sum certain," in addition to being an insurance contract. Accordingly, the owner of a Swiss fixed annuity (as well as other foreign annuities that are seen as debt instruments) pays tax on the income that accrues, including currency gains if the annuity is denominated in a foreign currency.

Tax experts agree that as a result of the loss of tax deferral, distributions prior to age 59½, including loans against the policy, are not subject to the 10% penalty for early withdrawals. Thus, it is possible to take tax-free withdrawals from a Swiss fixed annuity whenever the policyholder chooses.

This different tax treatment for foreign annuities on the whole provides substantially more flexibility for Americans purchasing Swiss fixed annuities. Interest and dividends on U.S. annuities are tax-deferred until withdrawn while those on Swiss annuities are taxable each year as ordinary income. For U.S. annuities, all previously untaxed amounts on withdrawals, liquidations and loan proceeds are taxed as ordinary income, with premature distributions (before age 59½) assessed a 10% penalty. No such taxes or penalties apply for Swiss fixed annuities. You can decide when or how to draw money from your annuity. Loan interest is never tax-deductible for U.S. annuities and tax-deductible for Swiss annuities when the loan proceeds are used to purchase other investments (such as stocks in a Swiss bank account).

Swiss annuities can be placed in various U.S. tax-sheltered plans, including IRAs, Keogh, or corporate plans. Such plans can also be rolled over into a Swiss annuity. If you wish to put a Swiss annuity in a U.S. pension plan, the only thing required is a U.S. trustee-a bank or similar institution-and that the annuity contract be held in the U.S. by that trustee. For a minimal administration fee many banks offer "self-directed" pension plans, which can easily be used for this purpose.

The inside buildup of an annuity contract is generally deferred from U.S. income taxation until withdrawn, at which time it is taxed under the provisions of the Internal Revenue Code (IRC) section 72, including possible penalties for early withdrawal.

IRS Tax Treatment
In the United States, a Swiss annuity is not even considered to be a "foreign investment account." IRS regulations clearly exclude overseas insurance and annuities from ownership declaration on an annual 1040 tax form or on Treasury form 90-22.1.
It should be noted that Swiss insurance companies do not report annuity payments to the IRS or any other government agency; this is the policyholder's responsibility.

Instant Liquidity
Another important feature of Swiss annuities is instant liquidity. Most annuities don't offer this. In a Swiss annuity account all capital, plus all accumulated interest and dividends, is accessible after the first year without penalty. Unlike most American annuities, if you need your funds for an emergency or wish to make another investment, you are not prevented from obtaining your money and you are not subjected to high penalties.

Most Swiss life insurance companies have a simple process for withdrawals, loans, or complete surrenders. This process requires minimal paperwork. You will have your funds wired directly to your bank within two to three weeks from the time they receive the paperwork.

Both Swiss annuities and American annuities have back-end deferred penalties when you withdraw more than a certain amount of money or when you withdraw the money too early in the contract period. However, Swiss annuities have a much lower penalty and much shorter penalty period than do American annuities. A typical American annuity might have 5% to 15% penalties for withdrawals over a period ranging from five to 15 years.

Many investors are excited about the low fees charged on Swiss annuities and Swiss life insurance. American annuities have much lower fees than American life insurance policies, but still they are usually more than twice as high as the expenses on a Swiss annuity.

In addition to saving investors money on fees, Swiss annuities offer more liquidity than American annuities in another important way. With a Swiss annuity, you can borrow out your money any time you want. Some Swiss life insurance companies will allow you to borrow up to 90% of the value of your annuity. If you have a Swiss annuity worth $1 million, you can get your hands on more than $900,000 of it almost instantly, with no company penalty, simply by taking out a loan.

Swiss annuities offer no "load fees," low surrender fees on withdrawals, short surrender periods, loan privileges, and the option of taking lifetime income. Access to your money is truly a hallmark of the Swiss annuity.

Darrell Aviss is managing director of SwissGuard International, an asset protection specialist firm based in Zurich, and is the author of Strategies for Protecting Wealth.