Private placement life insurance (PPLI) is a special type of investment that helps families and high-income individuals convert inefficient taxable assets into more favorable tax-efficient investments.
Who Is A PPLI Suitable For?
A PPLI policy is a useful type of investment for high-earning American taxpayers who choose to accumulate their earnings in a longer-term investment that is not subject to income tax. The compound effect on this type of investment can be significant.
It is worth noting that investors can still select their own investment managers with a PPLI and select from a list of attractive asset management offerings, providing them with more control over their investment than other types of life insurance.
Because PPLIs are considered unregistered securities, investors must meet the accredited investor and qualified purchaser regulations of the Securities and Exchange Commission.
This is currently defined as individuals who have a net worth of at least $1,000,000, a figure that excludes their primary residence. Those with an income of $200,000 or more in each of the preceding two years may also qualify; the threshold for married couples is $300,000.
However, qualified purchasers are generally individuals and trusts that have at least $5 million worth of net investments and entities that have $25 million or more in net investments.
PPLIs are often used by individuals who want to invest in hedge funds while also avoiding the tax burden. Investing in a hedge fund in one’s personal name, or through a trust or taxable account, means that every trade made generates a capital gains distribution. Any ordinary income will be taxed at a steep rate.
At higher income levels, this can pose a significant problem as federal and state income combined with capital gains taxes can equal nearly 50 percent in some places. Holding these assets in a private placement life insurance policy can be an excellent alternative. These policies essentially provide investors with the financial advantages linked to hedge funds while enjoying the tax advantages associated with life insurance.
It is important for those seeking a PPLI to be able to make a sizable investment in the first few years because the initial investment can help the policy become self-funding if the policy’s subaccounts perform well. Once the growth and cash value of the policy are sufficient for covering the cost of the insurance, the investor has the option to stop paying premium.
How Does A Private Placement Life Insurance Policy Work?
Life insurance has long been used by affluent investors to reduce their tax burden with alternative investments. Private placement life insurance is an attractive option because the investment will compound free of income tax as long as the policy remains in effect.
Although privately placed life insurance is structurally identical to conventional variable universal life insurance, the assets held in a PPLI subaccount can be customized to include numerous types of investments, including hedge funds and index funds.
Surrenders and withdrawals from these policies can generate ordinary income when they are not properly structured. However, investors can tap into the cash value of their policy free of taxes by taking withdrawals up to the amount of their investment or obtaining low-cost loans from their policy.
Those who hold a policy for life can accumulate considerable cash value without paying associated taxes along the way if their investments perform well. This cash value provides them with a source for tax-free withdrawals, funding for education, and enhanced death benefits.
Moreover, for those who hold these policies for life, the death benefit will be transferred to their heirs free of income tax. Those who place these policies in an irrevocable life insurance trust that has been properly structured can also avoid paying the related estate taxes.
The Benefits Of Private Placement Life Insurance
In addition to the tax benefits associated with private placement life insurance, investors can also enjoy the following advantages:
- Reduced commissions: The cost of private placement life insurance commissions is generally low compared to other retail life insurance products as the issuers have more interest in managing investors’ money than earning big commissions up front.
- Easier tax compliance: For hedge fund investors and those with interests in limited partnerships, tax reporting can be challenging. With a PPLI, there is no need to manage K1 reports and other strict reporting requirements.
- Protection from creditors: Cash value life insurance can help to shelter assets from creditors as life insurance and annuities are subject to asset protection throughout the nation. PPLI life insurance assets can also be held offshore if needed.
Schedule a Consultation with Vector Financial Group
A private placement life insurance policy can help affluent individuals invest their money wisely while reducing their tax burden. To learn more about how these policies can benefit you, contact Vector Financial Group today.