As federal and state budget deficits hit an all-time high, high-net-worth individuals and families may need to consider alternative ways to hold investments. Private Placement Life Insurance offers an alternative investment strategy that provides a lower-than-normal death benefit, thus maximizing the cash value of the entire policy.
PPLI is ideal for high net worth individuals interested in the whole life policies cash value who desires tax-free benefits on a range of investments.
What are the tax benefits of Private Placement Life Insurance?
The benefits will depend largely on each insurer’s policy. Still, overall, PPLIs offer Investment gain deferrals, tax-free income borrowing, tax-free policy transfers, policy flexibility, and no need for K-1 Forms.
Phantom Income not taxed
Suppose assets are held in a PPLI. The tax on phantom income is neutralized. Compared to some investments, which generate tax liability to the owner regardless if there is a cash value or distributed income.
Income Tax-Free Borrowing and Withdrawal
Cash value withdrawn or borrowed from PLLIs is not considered part of taxable income. Any income made of the policy is not deemed taxable.
Tax-Free Cash Value Growth
Unless a policy is terminated early or the insurer defaults on premium payments, the insurer will not need to pay taxes for a whole-life policy. All withdrawals and death benefits are tax-free.
Private Placement Life insurance is centered around diversified investments and maximizing cash value, which gives the insurer complete control over investment options and altering death benefits.
No need for K-1 Forms
PPIs are non-taxable, meaning investments made in PPLI pass-through entities will not delay filing tax returns and eliminate the need for K-1 forms. K-1 Forms are typically required for any income earner to pass liability to a third party who would then be responsible for associated taxes. With PPLIs, owners can give liability and benefits without circumventing taxes on the assets.
What is the difference between Private Placement Life Insurance (PPLI) and Variable Universal Life (VUL) policies?
PPLI offers similar benefits to Variable Universal Life (VUL) policies, as both provide investment returns inside their procedures. However, VUL policies are limited compared to PPIs. PPIs offer greater investment diversification with a spotlight on sophisticated investment strategies.
Compared to VUL policies, PPLIs offer policy owners an investment vehicle for tax-free borrowing and returns while offering a lower possible cost.
VUL and PPLIs provide the same tax benefits. However, PPLIs have essential advantages, such as institutional pricing, lower commissions and fees, and more options and diverse investment strategy.
How do PPLI investments work?
PPLI investments are invested into a separately managed account (SMA ) or an insurance dedicated fund (IDF) with premiums added over the insured’s lifetime. Cash can then be quickly withdrawn, loaned, or invested through the SMA or IDF, which would later be reflected in the death benefits process.
PPLI must pass two tests: the “prohibition against investor control” test and the diversification test (must follow Treasury Regulations). The “prohibition against investor control” test must show that the insurance carrier owns the SMA or IDF.
Essentially, the policy owner cannot control the SMA or IDF, thus releasing the power to select investment assets, vote or exercise rights related to securities, or extract money by withdrawal. Policyowners must be aware that if they fail either test (“prohibition against investor control”)
How to qualify for a PPLI
PPLI policies require an SEC-accredited investor or qualified purchaser with at least $3 million to cover annual premiums, the priorities towards cash value accumulation, and favor alternative investment strategies.
PPLI strategies that aim to be treated as life insurance must also adhere to the following requirements:
- The policy must include a minimum amount of mortality risk.
- SMA and IDF assets must be under the ownership of the insurance carrier (the policy owner owns the PPLI, which is then diverted into a separately managed accounts (SMA) or insurance dedicated fund (IDF)
- Policyowner cannot control investment decisions for SMA and IDFs (however, the policy owner can control investment decisions for the PPLI)
- PPIs must adhere to Treasury Regulations regarding the number of investments and maximum asset value.
Why consider PPIs now?
In turbulent times, tax planning and wealth transfer strategies require much attention, review, and trust from advisors and managers with solid knowledge and expertise in managing SMAs and IDFs.
Wealth transfer strategies are often subject to high state and federal taxes and with future marker predictability. In turbulent times, families should consider private placement life insurance as a tax-efficient solution.
Currently, tax planning and wealth transfer strategies require much attention, review, and trusted advisors and managers with solid knowledge and expertise in managing SMAs and IDFs.
Choosing a trusted advisor is integral to PPLIs success as these funds must abide by strict IRS enforcement against policy owners and investors that breach the “hands off” rule. Find a trusted advisor from the beginning and ensure your investment decisions and strategy are in the right hands when the agreement is fully negotiated.