Private Placement Life Insurance

An Asset Protection and Investment Tool

Customized private placement life insurance can provide significant investment and tax benefits for high-net-worth clients when used as an estate planning and asset protection tool.

Traditional cash value life insurance often is used as part of an estate plan solving an insurance need such as providing liquidity to the decedent-insured’s estate through a death benefit to his or her family. Over the last twenty years, a new life insurance product—private placement life insurance (PPLI)—has been offered by onshore and offshore carriers. PPLI is a specialized form of variable life insurance that is not registered by the U.S. Securities and Exchange Commission (SEC) and is available to high-net-worth clients.

When purchasing traditional cash value life insurance, the purchaser may pay less attention to the investment return of the cash value portion of the life insurance policy than to the death benefit.  In contrast, the purchaser of PPLI generally has two goals:

  • Meeting an insurance need for death benefit protection
  • Cash accumulation through increased buildup of the inside cash value.

As an investment tool, PPLI can hold a variety of investments, such as stocks, bonds, hedge funds, and other private equity investments that, over time, will enhance the policy owner’s accumulation goal.  When fully compliant with all applicable tax laws, life insurance (including PPLI) receives advantageous tax treatment, which allows policy investments to grow free of income tax and, with proper estate planning, to pass to beneficiaries free of estate tax on the insured’s death. Life insurance also may be owned by certain vehicles, such as trusts or limited liability companies, which can offer significant asset protection to the policy assets. The combination of several features makes customized PPLI particularly well-suited to achieving the investment, estate planning, and asset protection goals of high-net-worth clients:

  • Advantageous income and estate tax treatment;
  • Focus on accumulation and growth;
  • Nontaxable access to cash value during one’s lifetime;
  • Asset protection options; and
  • Meeting an insurance need of providing liquidity to the policy owner’s estate.

PPLI is a specialized type of cash value variable universal life insurance and policies must fully satisfy the requirements for “life insurance” under the Internal Revenue Code

PPLI policies differ from traditional non-PPLI cash value life insurance policies because they are specialized and offer more customizable features.

These features include:

  • Negotiated and often reduced fees
  • A customized death benefit, and selection of either a modified endowment contract or non-modified endowment contract as described below.

Although they once required a premium investment of at least $25 million, PPLI policies now are available to clients willing to make a total premium commitment of at least $2 million.

Policies may be purchased from either domestic or foreign insurers. Domestic insurers are subject to SEC regulations, which require purchasers of domestic PPLI policies to be “accredited investors” and generally to also be “qualified investors.” In effect, purchasers must have annual income of at least $200,000 and minimum net worth of $5 million.

As previously noted, PPLI policies may contain a variety of investments. Because policy owners may pay premiums into a policy as quickly as permitted by the Code and policy design, the cash value portfolio may be fully invested early in the life of the policy. As a result, the policy investments may experience more appreciation and income generation than if premiums were paid in more slowly over the life of the policy.

PPLI policies tend to have significantly lower premium loads than traditional non-PPLI policies. Typically, they are approximately 1% of the total premium commitment.

It is important to consider the features of a PPLI policy. A good policy might include the features discussed below.

As noted earlier, segregated accounts (either required under applicable law or offered by the insurer) protect the cash value of each policy from any claims of creditors of the insurer or its other insureds.   Because the use of segregated accounts is not required by all insurers, prospective purchasers of PPLI policies should ensure that their policy investments are held in segregated accounts.

Illustrations and ledgers for PPLI policies tend to be more transparent than for traditional cash value life insurance. This transparency enables clients and their advisors to ensure that a PPLI policy will meet client objectives for investment, estate planning, and asset protection. Open and transparent review of all fees, costs, mortality expenses, and loads permits proper evaluation of interest payments from the estate, potentially reducing the size of the taxable estate and increasing the size of the policy’s cash value without incurring gift taxes.

Life insurance planning dovetails with many estate planning concepts, such as using trusts, liquidity planning, gifting, and beneficiary designations, to avoid probate. Fundamental concepts of life insurance, including death benefit liquidity, tax-deferred accumulation, creditor protection of the cash value, gifting opportunities, and efficient wealth accumulation and wealth shifting through the use of PPLI, often comport with a client’s estate planning goals. If the concepts of PPLI make sense for the client, the client’s advisors would initiate the process of working with a suitable PPLI insurer leading to the eventual purchase of a PPLI policy that complements the client’s estate planning goals.

In its most general terms, asset protection planning is the legitimate use of planning techniques and state and federal laws to protect assets from the reach of future unknown creditors. Life insurance generally, and PPLI specifically, offers numerous asset protection features, some of which are discussed below.

The state where the policy owner resides determines which exemption laws will apply. Some offshore jurisdictions and more than half of the states exempt part or all of the cash value of a life insurance policy from the reach of creditors.  Some states also exempt the death benefit. States that provide unlimited exemptions to the cash value and death benefit include Arizona, Florida, Illinois, Kansas, Montana, Nevada, New Mexico, New York, Texas, and Wyoming. Many states also protect the death benefit payable to a trust. For example, Indiana, Maryland, Mississippi, New Jersey,New York, and Oklahoma have such statutes.

There are several ways to protect assets through ownership structure. An ILIT may own a PPLI policy and be designated as the policy’s beneficiary, so that on the insured’s death, policy proceeds will be paid to the trustee and distributed in accordance with the terms of the ILIT. Using an ILIT to own PPLI can offer significant asset protection and estate planning benefits, including those listed below:

  • The PPLI policy and its cash value are not owned by the person seeking asset protection. Retitling of the asset out of the client’s name into a trust is a hallmark of asset protection planning.
  • Estate tax inclusion in the surviving spouse’s estate can be avoided if the ILIT is to benefit the surviving spouse on the insured’s death. This tax result is more favorable than if the surviving spouse were designated as the beneficiary of the policy and received the proceeds directly, because the proceeds remaining at the death of the surviving spouse would be included in his or her estate.
  • An ILIT can avoid inclusion of the death benefit in the insured’s gross estate through proper design that ensures the insured has no incidents of ownership.
  • It is possible to take advantage of the gift tax annual exclusion amount via “Crummey Power” withdrawal provisions.

A customized PPLI policy can legitimately allow investments to accumulate free of income taxes and to pass to beneficiaries free of income and estate taxes, while remaining beyond the reach of creditors and providing a significant death benefit to heirs. Given the potential benefits of customized PPLI, practitioners who advise high net-worth clients may wish to consider it as part of their overall estate planning, wealth accumulation, and asset protection strategy.

how may we help you?

If you have any further questions or to submit a inquiry online, please contact us today!