Private placement life insurance is a multi-jurisdictional wealth planning tool tailored to help high-tax bracket individuals find a plan that allows for untaxed multi-million dollar investments in life insurance plans that avoid high state income and capital gain taxes. Each PPLI is designed for each client’s needs and allows for diversified investment strategies. This results in higher financial rewards and strategic wealth planning to ensure your legacy reaches future generations.
PPLI follows a similar planning structure to trusts, companies, foundations, and funds that allow clients to diversify their portfolio within a legal structure of life insurance that helps navigate high taxes on wealthy families and individuals looking for high-reward investment opportunities, asset protection, and death benefits.
Overall, the goal of PPLIS is to avoid estate tax depreciation, which makes significant assets available and not subject to federal and state estate taxes.
How does Private Placement Life Insurance work?
The overall idea is to reap the same financial gains as heavily taxed hedge funds and significant investments yet access the tax benefits of a life insurance plan.
The three parties involved in PPLI include the policyholder, the insured person, and the beneficiary. Anyone can buy as per PPLI policy. However, only agents can present them to accredited investors, as PPLIS are unregistered security products.
According to the current Securities and Exchange Commission (SEC), Accredited investors include those with a net worth of at least $1 million or an income of at least $200,000 in the preceding two years.
The policyholder is the sole owner of the policy with the right to choose the investment strategy, appoint beneficiaries, and make any changes they desire. The policyholder can be an individual, company, or trust/foundation. For a trust or foundation policy, the insurer can keep the insurance policy out of their taxable estate.
PPIs allow the insurance to reduce eventual estate tax liability potentially. However, PPIs require the insurer to give up rights to access the cash value before death. Investing through PPLI can speed up the process of making assets income tax-free while residing inside your taxable estate.
Who should acquire Private Placement Life Insurance?
PPL exists for wealthy families, foundations, trusts, and corporations with a net worth of $20 million or an annual income in the millions. PPLI is only made for some but offers a long-term strategic advantage to retail life insurance policies.
The perfect PPLI candidate has the following:
- A high net worth
- Interest in a hedge fund or alternative investment exposure
- The desire for tax-inefficient investments
- Increased state and local taxes
- Ability to fund at least $1 million in annual premiums or 3-5 million within the first several years
In the first several years, PPLI candidates must make significant investments that can eventually allow the policy to become self-funding (meaning the growth in cash value covers the insurance costs).
How is Private Placement Life Insurance different from retail life insurance policies?
Retail life Insurance and PPLIs are both purchased with the guidance of a financial or insurance adviser without buying directly from the insurance company itself. Retail life Insurance and PPLI allow the insurer to explore various insurance providers, plans, and options.
PPIs are only offered privately to accredited investors allowed to deal, trade, and invest. On the other hand, retail insurance products are available to anyone and PPOs offer lower fees, commissions, and other costs than retail life insurance. PPIs also provide significantly more extensive investment and management options allowing policy owners to invest in more options like tax-inefficient assets, private equity funds, and venture capital (all through their life insurance portfolio).
What are the tax and other benefits of Private Placement Life Insurance?
Overall, PPLI offers power tax benefits and sophisticated asset management offerings that make life planning more accessible and secure and enhance the overall wealth transfer and charitable process.
For wealthy families and high-income individuals, when properly structured, PPLIs offer one the most tax-efficient ways to ensure your legacy is passed correctly down on an income tax-free basis while eliminating all deferred gains following the insurer’s death.
PPLI also offers insurers an efficient strategy to counter changes in tax laws and increases in federal and state income tax rates, which can be especially beneficial to wealthy families and individuals in states with fluctuating high-income taxes.
Additional Considerations
When purchasing Private Placement Life Insurance, consider the incremental costs such as Structuring fees, Federal Deferred Acquisition Charges, state premium tax, mortality charges, and administration fees.
While PPIs offer a more secure strategy for combating tax increases and changes, they are still subject to changes in law and the IRS’s interpretation of tax laws.
Discuss with a financial advisor to better understand these extra considerations, as PPLIs are tailored on a case-to-case basis depending on the insurer’s unique wealth portfolio
