What Is Private Placement Life Insurance (PPLI)?
Private placement life insurance (PPLI) can be attractive to ultra-high net worth individuals because it combines the tax advantages of traditional life insurance with lower costs and greater investment flexibility than most standard life insurance products.
PPLI flips traditional life insurance on its head. Instead of being optimized for the eventual death benefit, it is usually structured to maximize the cash value accumulation by making significant upfront premium payments. Meanwhile the death benefit (and thus the cost of insurance) is kept relatively low.1
If structured properly, this has the potential to create tremendous tax advantages in the form of tax-deferred growth of the cash value plus a tax-free death benefit to heirs. Policy owners can still access the cash value tax-free through withdrawals or policy loans.2
Here are nine PPLI questions to consider:
1. Who manages the underlying PPLI investment?
As the policy owner, you can choose any investment advisor who is already approved by the insurance carrier or who is willing to go through the approval process. This can give you access to most products across the investment landscape, subject to IRS standards for investor control and diversification.
2. Can I change investment managers?
Yes, you can change investment managers inside the policy tax-free at any time, subject to the liquidity of the underlying investments. Be aware that the policy must be structured carefully to comply with IRS investor control rules.
3. Can I hold alternative asset investments in PPLI?
Yes, one of the main advantages of this strategy is being able to defer taxes on tax-inefficient alternative investment vehicles inside the policy. However, there are diversification requirements to avoid concentration and liquidity risk and still qualify as life insurance.3
4. What fees are involved with PPLI?
The fees fall into two categories—investment management fees and policy charges.
a. Investment management fees are based on a fee structure that you agree to with the portfolio manager you use to invest the PPLI assets.4
b. Policy charges include things like Federal Deferred Acquisition Cost tax, state premium tax, placement fees, mortality charges and asset-based charges. Often these charges are less than 1% annually over the life of the policy. Please speak with an insurance broker who focuses exclusively on PPLI transactions for details.5
5. How can there be a tax-free death benefit and a step-up in basis upon death?
The PPLI policy death benefit is made of two parts:
a. The account value (invested amount)
b. The net amount at risk (the death benefit portion paid by the insurance company)
When the insured dies, the PPLI death benefit (account value + net amount at risk) is paid in cash, free of income tax, to the policy’s beneficiary. Since cash is a full basis asset and the death benefit is not taxable (if structured properly), a step-up in basis is achieved upon the death of the insured.6
Not only that, but by using the appropriate estate planning structure, there is the possibility of transferring the initial asset and thus subsequent growth outside of your estate as a legacy trust. Please speak with your estate planning attorney for further details.
6. What are the risks when borrowing against the policy?
One primary risk when borrowing against a PPLI policy is that the account value becomes insufficient to cover policy charges and the policy lapses. If the policy lapses, then the policy loan balance in excess of the basis becomes taxable.7 This is a risk that can be managed with the help of a life insurance professional with PPLI expertise.
7. What is the tax reporting requirement for PPLI?
No documentation is provided to the IRS when a PPLI policy is established. If a withdrawal is made, a 1099 tax summary is issued to the IRS like any other life insurance policy withdrawal.8
8. Can the policy be unwound if things change in the future?
The policy can generally be unwound at any time, subject to the liquidity of the underlying investments. There are normally no surrender charges or penalties to unwind the policy. However, if the policy is fully surrendered, any gain in the policy becomes subject to income tax.9
9. Who can help me get started?
Because every situation is unique, we believe it is best to talk through your specific scenario, risk tolerance and potential drawbacks with a financial advisor who can collaborate with a PPLI specialist.
Private placement life insurance can combine optimized tax advantages of life insurance with lower costs and a broader set of investment opportunities. If that sounds interesting to you, please speak with your Corient Wealth Advisor.
1 https://www.loeb.com/en/insights/publications/2022/12/private-placement-life--insurance--an-overview
2 https://www.wealthmanagement.com/insurance/private-placement-life-insurance-explained
3 https://www.irs.gov/pub/irs-drop/rr-07-58.pdf
4 https://www.loeb.com/en/insights/publications/2022/12/private-placement-life--insurance--an-overview
5 https://www.loeb.com/en/insights/publications/2022/12/private-placement-life--insurance--an-overview
6 https://www.loeb.com/en/insights/publications/2022/12/private-placement-life--insurance--an-overview
7 https://www.loeb.com/en/insights/publications/2022/12/private-placement-life--insurance--an-overview
8 https://www.irs.gov/pub/irs-wd/0244001.pdf
9 https://www.valuepenguin.com/life-insurance/private-placement-life-insurance
ABOUT THE AUTHOR
Matthew R. Adams, CPA, CFP, CDFA
Matt is a Partner, Wealth Advisor in our San Diego office. Matt joined legacy firm Dowling & Yahnke Wealth Advisors in 2017. He is a CERTIFIED FINANCIAL PLANNER™ professional and holds the Certified Public Accountant (CPA) and Certified Divorce Financial Analyst certifications. Matt completed his undergraduate work at UC Santa Barbara, where he majored in business economics and accounting, graduating cum laude. He was also an intercollegiate men’s volleyball scholar-athlete at UCSB.
CONTENT DISCLOSURE
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