Private Placement Life Insurance (PPLI): The Ultimate Guide [2023 Edition]

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Many people are unaware of private placement life insurance (PPLI). It has been a little-known secret for many years. But thanks to changes in estate law, it is gaining more popularity. 

What is Private Placement Life Insurance (PPLI)?

PPLI is a unique type of life insurance designed for people who want to avoid estate and income tax on investments. The purpose of PPLI is to combine financial assets with the tax benefits of life insurance.

PPLI comes in the form of a variable universal life insurance policy, which is a type of permanent life insurance. It provides cash value by investing in a broader range of investments that are not often available to the general public. But contrary to most life insurance policies, it’s structured to maximize cash value and minimize the death benefit. 

Who Qualifies for Private Placement Life Insurance?

PPLI works best for wealthy people, business owners, or even corporations. It is often used by very high net worth people with annual income usually above $1 million a year and a net worth of over $10 million. This is because the policy will require you to contribute a minimum of $1 million to establish. 

PPLIs are actually an unregistered securities product. Agents can only sell it to you if you meet specific criteria as an accredited investor. An accredited investor is anyone who:

  • Earned income over $200,000 a year for each of the prior two years ($300,000 for a married couple) and are reasonably assumed to earn the same in the current year; or
  • Has a net worth of over $ 1 million (excluding the value of your home).

Top Benefits of Private Placement Life Insurance

PPLI has some major benefits, including:

  • Various investment options include private equity, stocks, mutual funds, and hedge funds. 
  • Tax-deferred growth on earnings and tax-free withdrawals
  • Ability to borrow against the cash value of the policy tax-free
  • Tax-free death benefit
  • No surrender charges
  • Lower premiums, commissions, and ongoing fees
  • Estate exclusion

Life insurance itself has many of these benefits. But the fees are higher, and there is typically no ability to invest in more speculative investments like private equity and hedge funds.

Disadvantages of Private Placement Life Insurance

There are several downsides to a PPLI:

  • Underwriting can be an issue. A medical exam is required just like other forms of life insurance, a medical exam is required.
  • Lack of control. The IRS has a rule called the investor control doctrine. This dictates that investors do not influence the policy’s investment selection of securities. Otherwise, the policy owner will lose the tax-free income growth on the policy and pay penalties. 
  • Structuring fees—typically about 1% of the premium, which is significant, given the investment size.
  • The benefits of PPLI take years to develop. The initial fees and taxes could exceed tax benefits in the early years. 

If you are not in good health or don’t want to get a medical exam, you could consider a private placement variable annuity, which is simpler to buy. They’re also less expensive. 

How Does It Work?

PPLIs seek to maximize the cash value and minimize the death benefit. They are structured like a variable universal life policy. Premiums are flexible, although many investors overfund the plan to have access to the accumulated cash value.

There are rules around how much you can contribute because the IRS wants life insurance to act like life insurance and not a tax shelter. It’s called the 7-pay test, and if you contribute so much money to the policy that it would be paid up in seven years or less, it becomes a Modified Endowment Contract (MEC), and you lose many tax advantages. 

The investments must comply with specific diversification requirements. It must contain at least five different assets, and each investment needs to be weighted so that no one investment dominates the account. Failing in this requirement would mean losing the tax advantages of a PPLI. 

You don’t have to wait until 59 1/2 (as with an IRA) to access tax-free cash distribution. You can borrow against, withdraw the cash value tax-free, and you don’t have to repay the money. You might want to, though, maximize the long-term tax-free growth. 

How is PPLI Different from Other Life Insurance Policies?

A PPLI is a variable universal life insurance policy. A PPLI differs in the risk of the investments and the value of assets. Variable life insurance investors choose from a limited menu of investments and usually emphasize long-term, slower growth. 

Someone who buys a PPLI can customize the subaccounts, and they can choose from almost any type of investment, including international investments. 

Last Thoughts

If it seems that PPLIs are incredibly complex, you would be right. You need a sophisticated wealth manager or experienced private placement insurance agent to figure it all out and set one up correctly. The good news is that if you are in the market for a PPLI, you can probably get recommendations for such people. The tax advantages are significant, which is most of the appeal of PPLI. 

If you don’t qualify for PPLI, don’t despair. An excellent variable universal life insurance or indexed universal life insurance policy can do the same, only for ordinary folk.

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