The private placement life insurance (PPLI) company premium figures published in the 2024 Lion Street/Life Insurance Strategies Group PPLI Market Report reveal that the PPLI market has been experiencing hockey stick growth. Much of this has to do with the 2021 change to Internal Revenue Code’s Section 7702 definition of life insurance where most policies used for cash accumulation, like PPLI, can now receive a lot more premium with no change in the required death benefit.
As one example of increased interest in PPLI, Prudential Financial reported having $1.7 billion in assets under administration at the end of 2021 (after two decades of selling PPLI) and $4.5 billion AUA at the end of 2023. Other carriers in the market experienced similar growth. It seems every investment manager worth their salt is talking about the benefits of PPLI, and this makes sense as the investments underlying PPLI are “sticky” and more quickly increase in value without taxation within a policy.
At LISG, half of our individual client engagement involves PPLI, so we are witnessing the increase in popularity first hand. As such, we thought it was time to cover the basics, so all our readers are caught up.
An Overview
PPLI is a type of variable universal life insurance designed to offer both death benefit protection and access to unique investment opportunities. These policies are typically used by affluent individuals and families, providing a platform for investing in tax-inefficient offerings, including alternative assets such as hedge funds, private equity, real estate, and other sophisticated investment vehicles.
Tax Advantages of PPLI
One of the key benefits of PPLI is its tax-efficient structure. The policy allows for the deferral of investment gains, meaning growth within the policy accumulates tax-free until accessed. Policyholders can make tax-free withdrawals up to the policy’s cost basis and can also take out loans against the policy’s cash value without triggering income tax. Furthermore, the death benefit proceeds are generally paid to beneficiaries tax-free.
Cash Value Accumulation
PPLI policies are structured to accumulate cash value over time. This accumulated cash can serve various purposes, including funding education, supplementing retirement income, or increasing the death benefit. Policyholders can access this value through withdrawals or policy loans.
Withdrawals from a PPLI are tax-free up to the amount of premiums paid (cost basis). Any amount withdrawn beyond the basis is taxed as a gain. Loans secured by the policy allow policyholders to access cash value without triggering a taxable event, providing an additional layer of financial flexibility.
By incorporating typically tax-inefficient investments into a PPLI, policyholders can achieve greater tax efficiency. With proper structuring, PPLI offers a powerful tool for minimizing tax liability and growing wealth.
Role of Investment Managers
Professional investment managers are crucial to the success of a PPLI. These managers oversee the portfolio within the policy, making allocation decisions that align with the policyholder’s objectives. They actively manage and monitor investments, including hedge funds, private equity, or real estate holdings, ensuring optimal performance over time.
The selection and management of investments are governed by the IRS’s investor control doctrine. This rule ensures that policyholders do not have direct control over individual investments. While policyholders may provide general guidelines or recommendations, investment decisions must be independently made by the manager to preserve the policy’s tax benefits.
Death Benefit Protection
Though PPLI policies emphasize investment growth and cash accumulation, they still provide a death benefit to beneficiaries. However, the focus on accumulation means that these policies often offer a lower death benefit relative to their cash value.
For those with higher death benefit needs, PPLI may be complemented with traditional life insurance policies focused on protection. This strategy ensures that policyholders can enjoy both the investment advantages of PPLI and adequate death benefit coverage.
Eligibility Criteria
PPLI is designed for high-net-worth individuals and requires meeting certain financial thresholds and medical underwriting standards. To purchase a PPLI policy, an individual must meet the qualifications of either an accredited investor or a qualified purchaser.
Accredited Investors: Must have a net worth of at least $1 million (excluding the primary residence) or an annual income of $200,000 (or $300,000 for couples) for the past two years.
Qualified Purchasers: Must have an investment portfolio valued at over $5 million or be part of a group with a portfolio worth more than $25 million.
Financial contributions for PPLI policies typically range between $10,000,000 and $50,000,000 in total premium, though some carriers may set higher minimums. Additionally, individuals must undergo medical underwriting to assess their insurability based on health and medical history.
Investment Opportunities within PPLI
PPLI opens the door to investments beyond those traditionally offered by insurance companies. Policyholders can access opportunities in hedge funds, real estate, venture capital, closely held businesses, intellectual property, and more. This flexibility makes PPLI attractive to wealthy families seeking tax-efficient growth.
Through PPLI, investors gain exposure to sophisticated strategies not available in retail policies. These policies enable investors to hold diverse asset classes that might otherwise be considered tax-inefficient outside the policy structure.
Ownership Structures of PPLI
PPLI can be structured either domestically or offshore, with ownership options influencing the policy’s tax treatment and estate planning benefits. Offshore PPLI is typically purchased by individuals with foreign assets, foreign managers and foreign custodians, while domestic PPLI is offered by U.S.-based carriers.
Policies are almost always held within an irrevocable life insurance trust (ILIT), often a generation-skipping trust. Ownership structure affects the policy’s exposure to income and estate taxes. When structured within an ILIT, PPLI proceeds are excluded from the policyholder’s taxable estate, potentially reducing estate tax liability.
An ILIT also offers additional benefits, such as creditor protection and access to liquidity through loans against the policy. This structure ensures that the policy’s value is preserved for future generations, providing long-term financial security.
It is all the Rage
PPLI is a versatile financial and estate planning tool designed for high-net-worth individuals, combining death benefit protection with access to alternative investments. Its tax advantages, including deferred growth and tax-free withdrawals, make it an attractive option for those seeking to grow and preserve wealth. With proper management and structuring, PPLI offers a flexible solution for both investment growth and estate planning needs.
At Life Insurance Strategies Group, we do not sell products. We help our individual and institutional clients make complex decisions involving life insurance. If we can help you, reach out to us at www.lifeinsurancestrategiesgroup.com