The Benefits of Private Placement Life Insurance
More from the "How to Make It, How to Keep It" series
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This article continues my quest to educate my readers in the areas of "How to make it" and "How to keep it." Today's topic, private placement life insurance (PPLI), is an income tax saver, an estate tax destroyer and a superior asset protection device for those falling into the top 1% of taxpayers carrying the brunt of federal income taxes.
PPLI is a form of variable universal life insurance that is offered privately, rather than through a public offering. Variable life insurance has cash value that is dependent on the performance of one or more investment accounts in the policy. Since the insurance company cannot know the specific investment goals of each traditional policy purchaser, the carrier often settles for registering a set offering, including a selection of mutual funds or hedge funds as investment options within the policy. The carrier customizes the investment options to meet the needs of each owner/investor.
The prime purpose is to make your investment profits (whether capital gains, dividend income or interest income) tax-free. Simply put, all policy investments are wrapped in a tax-free insurance envelope.
Just how significant are the wealth accumulation results of taxable vs. tax-free? The example given in the table below, which was created by Austin, TX, tax lawyer Lewis Schiff, will astound you.
A PPLI policy insures a 45-year old male paying $2.5 million in premiums for 5 years (a total of $12.5 million). The assumed rate of return is 10% (net of investment-management fees), taxed as ordinary income (at 40%, including federal and state taxes).
Two huge advantages pop out: 1) The death benefit is always king. 2) In the long-run, use every opportunity (notice the huge amount in "cash value" after 20 years compared with "taxable investment") available to get into an income tax-free environment. Neither the "cash value" increases nor the "death benefit" is subject to income tax. PPLI premiums start from a low of $1 million (for example, $250,000 per year paid over four years) to a more typical $5–$10 million or more (paid in the early years). They can range as high as $5 million or more paid as a single premium at inception.
Other advantages of PPLI include:
Liquidity. When needed, you can borrow a portion of the "cash value," which can be paid back at any time or out of the "death benefit."
Asset protection. Your investments are placed in separate accounts, avoiding any risk of insurance company illiquidity.
Risk minimization. Insurance is a risk-shifting strategy in the event of a premature death, always supplementing the tax-free investment results (at any age).
Estate tax-free. The PPLI arrangement can be set up so the ultimate death benefit is not subject to estate taxes.
Investment flexibility. You can, with the help of the insurance company, select from a large number of hedge funds. Or you can work with a third-party advisor of your choice. You can even switch advisors or have more than one. It's also permissible to invest in a private equity deal (maybe one of your own companies or someone else's) that you think has great upside potential.
Low investment cost. Traditional agent commissions are eliminated, letting more funds "work" inside your policy. Typically, PPLI is placed with an offshore insurance company, further reducing the policy costs. Also, there are no surrender charges or other insurance company penalties.
What if your health or age prevents you from getting insurance, including PPLI? You can still purchase a private placement deferred variable annuity (PPDVA). This type of annuity is similar to a PPLI except income is deferred until the policy owner takes a distribution, which is then taxable at ordinary income tax rates.
If you have a large investment portfolio, whether CDs, municipal bonds, hedge funds, stocks or bonds, or any of the other endless parade of investment vehicles, then PPLI is something you should look at.
Your investment wealth is sure to compound at an accelerated pace because you won't lose one cent in income taxes.
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PPLI (Results in millions rounded)
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End of Year
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Taxable Investment
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Cash Value
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Death Benefit
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1
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$ 2.650
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$ 2.665
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$ 43.900
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5
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12.288
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13.354
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43.900
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10
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16.445
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20.508
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43.900
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20
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29.450
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50.071
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61.087
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30
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52.740
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125.095
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133.851
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40
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94.449
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312.915
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328.560
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