The Basics of Private Placement Life Insurance
By Ben Rainey and Aidan Elliott
Private Placement Life Insurance (PPLI) is a unique and niche solution that allows for tax-efficient investment opportunities. Our multi-disciplinary advisory team at WealthPoint has utilized PPLI as an investment strategy for years with our clients as it protects more of their earnings and takes advantage of favorable tax rules that govern life insurance policies.
At a high level, Private placement life insurance is,
- An institutionally priced life insurance product designed for affluent families
- An investment solution that increases potential returns by eliminating that spend on taxes
Our advisory team is well-versed in many life insurance strategies and has compiled some basics and frequently asked questions regarding PPLI.
What is Private Placement Life Insurance?
PPLI is a comprehensive wealth management tool offered by domestic and foreign insurance companies that allows clients to invest on a tax-advantaged basis in certain investments through variable insurance products. The benefit of PPLI is its enablement of high net worth investors to defer taxes on the growth of investments held within the policy. It also shields these assets from unwanted predators.
PPLI can allow clients to invest in tax-inefficient asset classes and compound their wealth much more effectively over the long term than they can by investing on a traditional “taxable” basis. When structured properly within an overall estate plan, PPLI also allows individuals to transfer wealth to future generations in a tax-effective manner.
PPLI tends to carry much lower overall upfront and ongoing cost structures when compared to retail or traditional insurance products, and also allows the policyholder to access a much wider range of potential investments through the contract (hedge funds, private equity, private credit, real estate, and other assets).
How does Private Placement Life Insurance work?
After an insurance carrier issues a private placement life insurance contract, the assets used to fund the policy by the client are placed by the carrier into a separate investment account linked to the contract, known as the “cash value”. PPLI contracts also provide a corridor death benefit in excess of the policy’s cash value.
The cash value investment account assets are considered segregated from the general assets and liabilities of the insurance carrier. This cash value is then used to fund one or more investment options selected by the investment advisor of the policyholder.
What are the tax implications of Private Placement Life Insurance?
Invested cash value accounts grow tax-deferred within a PPLI contract. Depending on the policy design, PPLI policyholders have the ability to access liquidity from the contract by borrowing tax-free from the policy’s cash value during the insured’s lifetime.
If the PPLI is surrendered prior to the policyholder’s death, profits built up inside of the contract are taxed as ordinary income, and the whole basis is returned tax-free. Alternatively, upon the insured’s death, the contract’s cash value and any additional death benefit are paid to the policy’s beneficiaries income tax-free.
Who should consider PPLI?
Private placement life insurance is only offered to accredited investors or qualified purchasers as defined by Federal securities laws. In order to fully utilize the income, estate, and asset protection planning features unique to PPLI, we recommend that clients considering funding a policy have a minimum net worth of $20,000,000 or more in investable assets.
What are the investment strategies within a PPLI?
Due to the tax-deferral benefits afforded through Private Placement Life Insurance, many investors elect to hold tax-inefficient strategies (i.e. mutual fund, hedge fund, fund of funds, private equity, private credit, etc.) within the PPLI.
For more insights on how a private placement life insurance policy can maximize your returns, check out the PPLI case study put together by the advisors on our team. Looking for more information on how WealthPoint can assist in your PPLI management? Reach out to our team of professional advisors today!