What is Private Placement Life Insurance?

For those who have at least a few million dollars and have a high income, Private Placement Life Insurance is advisable. Often shortened to PPLI, Private Placement Life Insurance was originally designed for those who want to invest in hedge funds, For wealthy investors in a high tax bracket who want to invest their money anyway, it often makes sense to have their money within a privately placed life insurance policy to avoid individual taxes and other fees and penalties. 

Many well-known banks and investment companies are also the most prominent providers of Private Placement Life Insurance, as well as insurance-dedicated funds. Among them are BlackRock, Crown Global, John Hancock, Pacific Life, Wells Fargo Private Banking, and Zurich.

How It Works

Standard life insurance policies will not contain alternative investments or hedge funds. Traditionally, the policies are paid into but do not grow in the same way other investments do.

Hedge funds, market accounts, and other investments are heavily taxed, and can be subject to estate and inheritance taxes if large enough or not structured correctly. 

Private Placement Life Insurance uses the tax advantages of life insurance while getting the monetary gains of hedge funds. The administrative costs associated with life insurance contracts are almost always more than worth the tax savings that you get with a properly structured PPLI. Also, the death benefit itself more than makes up for any additional costs. 

More than the death benefits and tax savings, Private Placement Life Insurance allows for more fluidity. The insured can usually access their funds tax-free and without other usual fees, thanks to policy withdrawals and loans. 

PPLIs are variable, universal life insurance policies, but are also unregistered securities products. As an unregistered security product, only accredited investors can be presented with them, via insurance agents. Most professional wealth managers will have connections with insurance vendors and agents to connect interested parties. 

Ultimately, PPLIs are structured in the same way that variable universal life insurance policies are. As such, premiums for PPLIs are flexible, allowing policyholders to pay as little or as much premium as they like, on a variable, changeable pay schedule. The costs and fees associated with the insurance policy are deducted from the cash value in policy subaccount. This happens monthly or yearly dependent on the policy. To keep the policy active, the policyholder must only pay enough premiums to maintain the cash value that will cover the cost of insurance. The policy will lapse if the cash value of the investment reaches zero. 

While the policy is being set up, agents will usually structure the policy to maximize its ability to accumulate cash value. In contrast, the death benefit of the insurance will be kept low, thus keeping the cost of the insurance low. 

Clients will get tax-free death benefits for their heirs, tax-deferred growth of cash values, and tax-free dividend growth, all while maintaining access to their accumulated cash values. There are little to no penalties for accessing the value of their insurance before age 59. There are also more required minimum distributions. 

The individuals and families that own these policies are prohibited from exercising influence over the specific investment decisions relating to the policy. The IRS may disqualify the tax advantages of the policy if the owner tries to exercise too much control. 

That being said, there are requirements for the diversification of the PPLI’s investments. No single investment can make up more than 55% of the portfolio, while no more than two may make up more than 70%, no more than three can make up more than 80%, and no more than four can make up more than 90%. In practice, this means the portfolio must contain at least five distinct investments, or be subject to disqualification from the IRS. 

Who Does Private Placement Life Insurance Make Sense For?

The best candidates for PPLI would be someone with a net worth of more than $20 million and has an annual income in the millions. The owners or controllers of more substantial businesses would also be good candidates, as well as those with wealthy families, trusts, and other family foundations. Good candidates generate a substantial taxable income, capital gains that are not within a retirement account, or imputed income, also called phantom income. 

To qualify as an accredited investor under current SEC regulations, a single investor must have a net worth of at least $1 million - not counting your primary residence - or at least be able to prove an income of $200,000 or more over the last two years. For married couples, the demonstrated income must be at least $300,000 for the last two years. 

In practice, though, most who utilize PPLIs have a much higher net worth than the minimum, often with the ability to fund more than $1 million in annual premiums over several years. Typical annual premiums can float between $3 million and $5 million. These individuals also often have highly tax-inefficient investments and live in areas with high state and local taxes in addition to their federal tax rates. 

If you are interested in getting a PPLI, use the links on this website to get more information. Look into the offerings of multiple companies and compare policies to get the best PPLI plans for your unique needs.