Five Benefits of Private Placement Life Insurance Programs

With these programs, owners can combine the strength of investment products with the tax-free benefits of life insurance.

PPLI provides ownership of tax-inefficient hedge funds and other alternative investments in a tax-efficient structure.

By Jon Corrigan

Private Placement Life Insurance & Annuity programs, commonly referred to as PPLI, have quickly become a favorite strategy for ultra-wealthy investors seeking greater tax efficiency within investment vehicles. These programs allow policy holders to combine the strength of premium investment products, like hedge funds or other alternatives, with the tax-free benefits of life insurance. It’s estimated that clients put $3 billion into Private Placement products last year alone.

PPLI benefits

What specifically is drawing the wealthy to PPLI programs? They offer an array of benefits to investors.

• Policy holders own tax-inefficient assets in a tax-efficient structure. PPLI programs provide ownership of taxinefficient hedge funds and other alternative investments in a tax-efficient structure. The owner trades incurring short and long-term capital gain taxation for annual insurance and annuity charges—amounting to significant tax savings.

• Death benefit proceeds can pass to beneficiaries tax free. Section 7702 of the United States Internal Revenue Code defines how life insurance contracts are taxed. Death benefit proceeds are received income tax-free to the policy beneficiaries. The cash value in life insurance contracts grows on a tax-deferred basis, and if structured properly, both the investment cost basis and gains can be accessed income tax-free.

• There are no surrender charges. Unlike retail life insurance and annuity structures, there are no contractual surrender charges. The contract’s cash value can be accessed when needed, subject to the liquidity constraints of the underlying investments.

The policy has exposure to a variety of alternative money managers, strategies and asset classes. PPLI contracts have emerged as an attractive medium for exposure to traditionally high-tax, income-producing alternative asset classes. Both life insurance and annuity structures offer tax advantages—accomplishing temporary or permanent tax deferral.

• PPLIs have a transparent pricing structure. Transparent pricing structure is the concept of telling the client that the total fee, including the manager’s and the due diligence fee, the trading fee, and the custodian fee added are added to the service provider’s fee.

Ideal candidates for PPLI

There’s no way to sugarcoat it—you have to be exceptionally wealthy to play in the Private Placement world. Accredited investors or qualified purchasers are required to contribute a minimum of $2 million into a PPLI policy to set it up.

However, you get what you pay for. With a properly structured private placement policy, clients are able to capture returns without the high-tax implications typically associated with hedge fund investments. This amounts to healthy wealth accumulation for a client’s lifetime to preserve for his heirs and for charitable contributions, if he so chooses.

These returns can be accessed tax-free in two ways:

1. Withdrawing up to the investment in the contract

2. Borrowing funds from the policy

Funds that are left in the policy for life will never be subject to income taxes and heirs will receive the funds as an income-tax-free death benefit.

Jon Corrigan is a content marketing specialist for Schechter in Birmingham, MI. He assists in the development of communications to the media, the public, Schechter’s advisors, clients and strategic partners.