Private Placement Life Insurance (PPLI)

Private Placement Life Insurance (PPLI) is an insurance product available to qualified purchasers that typically requires an initial commitment or premium in the millions of dollars. This is in part due to the sophisticated nature of the product, and also the associated expense of creating what is in essence a custom insurance product for one individual client. PPLI is a niche type of insurance that may have significant tax benefits for higher rate taxpayers. It is also a complex product that requires professional structuring expertise and experience so as not to fall afoul of the various rules and restrictions that it must adhere to.

What differentiates PPLI from a more widely known type of investment-linked insurance product like Indexed Universal Life (IUL) is the ability for the policy to serve as an ownership vehicle for a wide range of investments that would otherwise not feature on the menu of insurance company investment opportunities. The policy is built specifically for the client based on their requirements and investment plans. Investment choices are custom and vast, permitting self-selected externally managed hedge funds, private equity and promissory notes among other things (although certain conditions must be met, and rules adhered to). PPLI is often used to hold tax-inefficient, income producing investments that would otherwise be subject to income taxes as PPLI policies allow investors to defer state and federal income taxes on income producing investments due to the insurance basis. If PPLI policies are settled onto an irrevocable trust then the insurance proceeds payable upon the death of the policyholder can pass unmolested to the policies beneficiaries, saving up to 40% in estate taxes and avoiding probate entirely. Other benefits of PPLI may be confidentiality of asset ownership, creditor protection and ease of management.

Increasingly wealthy individuals and their advisors are turning to PPLI in situations where they would have previously used trusts and foundations. This is particularly true for cross-border families who may have assets in jurisdictions with uncomplimentary legal systems (common Vs. civil). Use of a PPLI policy prevents “look-through” by tax authorities and the brute-force taxation of equitable beneficiaries as legal owners. As the life insurance company is the legal owner of the assets in the policy, the separation from both the policy owner and the beneficiary for the purpose of liability is definitive and inviolable.

Mrs. Client is has been investing with a private equity firm for the past 10 years in a number of different ventures. The returns have been nothing short of spectacular and surpassed only in scale by the tax bill that attaches them. The firm is launching a new fund and Mrs. Client intends to commit 10,000,000 USD to the newest offering. She does not need the money and intends for the proceeds of this investment, and any future investments, to be rolled-up inside the PPLI policy until her death, at which point the proceeds are to be paid to her beneficiaries- her two daughters. With her wealth manager, insurance company underwriter and lawyer, she creates a PPLI policy. The separate managed account (SMA) in the policy will invest in the PE fund. Disbursements paid by the fund are re-invested inside the PPLI and no income taxes are payable. When the fund kicks-out, producing a handsome return on her initial investment, no capital gains taxes are payable. Proceeds can be re-invested within the policy ad infinitum until her death.