Private Placement Life Insurance (PPLI): A Versatile and Efficient Investment Option
Private placement life insurance (PPLI) is an investment vehicle that remains underutilized despite its potential versatility and high efficiency. Contrary to popular belief, PPLI is not limited to wealthy families. Even individuals or families with a net worth of $1 million to $5 million can financially benefit from funding a PPLI policy.
Under the U.S. tax code (IRC § 7702), like all life insurance policies, PPLI policies enjoy the advantage of tax-free growth of assets. This means that investment growth within a PPLI policy is exempt from income or capital gains taxes. When the policy matures, the assets can be distributed to beneficiaries without any income tax implications. It is worth noting that estate taxes may still apply if the PPLI policy is part of the insured individual’s estate. However, by establishing an irrevocable life insurance trust (ILIT) and transferring ownership of the PPLI policy to the trust, estate taxes can be effectively avoided.
Foreign-based PPLI holds certain advantages over domestic PPLI. It offers lower minimum premium commitments (usually starting from $1 million) and has reduced start-up fees and carrying costs. On the other hand, domestic PPLI typically requires a minimum premium commitment of $5 million or more, restricted to cash payments only, and entails higher fees. Moreover, domestic PPLI is subject to investment restrictions imposed by individual states. It’s important to note that PPLI, being a variable product, is still exposed to market risks associated with its investments.
While conventional whole and universal life insurance policies provide tax-deferred growth, the cash value in these policies is part of the general investment fund of the insurance company. Consequently, the growth in cash value within these policies is relatively low, usually a few percent annually. Fixed index universal life (IUL) insurance policies offer higher growth potential but with fewer guarantees.
In contrast, PPLI is a privately negotiated life insurance contract between the insurance carrier and the policy owner. It offers several advantages over standard policies. PPLI policies have segregated accounts that protect funds against the carrier’s creditors. They also provide a wider range of investment opportunities managed by a professional investment adviser chosen by the policy owner. Additionally, policy costs are transparent, negotiable, and generally lower compared to off-the-shelf insurance products. However, domestic insurance companies in the U.S. typically require a minimum premium commitment of $10 million to $50 million for PPLI.
Offshore PPLI policies offer even more favorable terms compared to domestic PPLI. Foreign insurance companies are not bound by strict SEC and state insurance regulations, allowing for greater investment flexibility. Offshore PPLI policies are also exempt from state premium taxes imposed in the U.S. While policies issued by foreign carriers are subject to a 1% U.S. excise tax, they are not subjected to the federal deferred acquisition cost (DAC) tax. The major advantage of offshore PPLI lies in its offshore jurisdiction, which allows policy owners to select an insurance carrier not subject to U.S. courts’ jurisdiction. Offshore PPLI typically requires a minimum premium commitment of $1 million over five to seven years, with associated fees ranging from 1.5% to 2% of the premium load.
Another alternative to PPLI is a foreign deferred variable annuity (DVA).
For more detailed information about PPLI compliant with U.S. tax laws, consult the Law Office of Thomas J Swenson using the link provided in the resource box.
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