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What is Private Placement Life Insurance?
Private Placement Life Insurance (“PPLI”) is a variable universal life insurance product designed for high net worth individuals. It is offered by both domestic and foreign insurance companies and provides policy holders with sophisticated asset management choices, including a wide variety of hedge funds and hedge funds of funds.
Why are investors interested in PPLI?
Generally, the core motivation for acquiring a PPLI product is to establish a tax-free investment environment, at the lowest possible cost, in which an investor may designate hedge fund or traditional money manager(s) to manage the assets paid into the insurance policy. Furthermore, the death benefit component of the policy may be used in wealth transfer and estate tax mitigation strategies.
What are the income tax advantages of life insurance?
The income tax benefits of life insurance include: (1) tax-free earnings (dividends, interest, and capital gain) on policy assets; (2) the ability to withdraw and to borrow assets from the policy cash value free of income tax (with proper structuring); and (3) the receipt of policy proceeds by the policy beneficiaries at the death of the insured on an income tax-free basis.
What are the main differences between PPLI and retail life insurance?
- The PPLI policy owner has broader flexibility with regard to the policy’s underlying investments, and many hedge fund investment choices are available. However, the policy owner cannot exercise direct or indirect control over the investment of the policy assets.
- PPLI policy purchasers must meet “qualified purchaser” and “accredited investor” guidelines under SEC rules.
- Fees in a PPLI policy are almost always far lower than retail insurance products. Also, all costs within the policy are transparent, unlike in traditional insurance policies.
How do investors acquire a PPLI product?
Working with a broker who is unaffiliated with an insurance carrier and investment manager is the first place to start. The broker can provide guidance as to the structure of the PPLI policy, can prepare comparisons of the insurance carriers and negotiate on behalf of the client during the underwriting and policy implementation process.
How much should an investor commit to PPLI?
Some insurance companies will accept as little as a $500,000 first year premium. For optimum efficiency and results, an investor should plan to invest two or more annual premiums. If the investor wants to have the flexibility to withdraw or borrow policy assets on a tax-advantaged basis, the total premium commitment should be paid in equal installments over a period of time, typically four to five years.
What are the fees typically associated with PPLI?
There are three primary insurance-related fees associated with PPLI products: the premium taxes, insurance company charge, broker remuneration and the cost of insurance charge. The premium federal DAC premium tax is approximately 1% of premium and the state premium tax can vary. South Dakota and Delaware have very low state premium taxes so most policies are issued to trusts or LLC’s in those states. The insurance company and broker fees should be less than 0.50% of policy AUM per year and an investor should avoid brokers who charge a “structuring” or any kind of upfront or premium based fee. Cost of insurance charges vary based on the age and health of the insured.
What is involved in the acquisition process?
Acquiring PPLI requires that the prospective insured undergo medical and financial underwriting. The broker will coordinate all exams and paperwork.
What will the policy beneficiaries receive when the insured dies?
The income tax-free death benefit consists of the cash value of the policy plus the “risk” or pure insurance element. The insurance element generally will be minimized to the extent possible in the design process, and its amount will be determined with reference to U.S. tax rules.
Where is the investment account of the policy located, and is it safe?
PPLI investments are within a separate account and are not allocated to the insurance company’s general portfolio nor are they subject to creditor risk of insurance company insolvency.
For more information, please contact: Thomas Carstens:
369 Lexington Avenue, Suite 341
New York, NY 10017
917.639.5476 (direct)
tcarstens@peliongroup.com
NOTE: This document is for informational purposes only. It does not constitute an offer by Thomas Carstens, First Liberties Financial or any other party to you or to any other person or entity to acquire a life insurance product.