If you haven’t heard of private placement life insurance, you probably don’t qualify to buy it. Private placement life insurance is typically for investors with millions in liquid cash that they need to invest for tax reasons.
- What is Private Placement Life Insurance?
- Who Qualifies for Private Placement Life Insurance?
- Benefits of Private Placement Life Insurance
- Drawbacks of Private Placement Life Insurance
- Where to buy Private Placement Life Insurance?
- How does It Work?
- How is PPLI Different from Other Life Insurance Policies?
What is Private Placement Life Insurance?
Private placement life insurance (PPLI) is institutionally priced life insurance designed for wealthy investors who want to avoid the taxes of hedge funds. A hedge fund is like a mutual fund, only with a more aggressive investment strategy and higher risk. The idea behind PPLI is to combine the financial advantages of hedge funds with the tax benefits of life insurance.
PPLI is a variable universal life insurance policy, a type of permanent life insurance, that provides cash value by investing in a broader range of investments, some of which are not available to the general public. Unlike traditional life insurance policies, it’s designed to maximize cash value account and minimize the death benefit.
Who Qualifies for Private Placement Life Insurance?
PPLI is usually for wealthy investors, business owners, or corporations. Someone who has an annual income in the millions and a net worth of $20 million or more qualifies for private placement insurance.
PPLI’s are an unregistered securities product. Agents can only sell to you if you meet the criteria. According to the SEC (Securities and Exchange Commission) an accredited investor is anyone who:
- Earned income that exceeded $200,000 a year for each of the two preceding years ($300,000 for a married couple) and reasonably expects the same in the current year OR
- Has a net worth of over a million dollars
It’s important to note that you can’t include your home when calculating your net worth under these guidelines.
You must also contribute a minimum of $1 million dollars to a private placement life insurance to set it up.
Benefits of Private Placement Life Insurance
For the wealthy investor, PPLI has several significant benefits, including:
- No surrender charges
- Ongoing fees and premiums are lower
- Wide array of investment options, including hedge funds, private equity and real estate investment trusts
- Tax benefits of life insurance, including tax-deferred growth on earnings and tax-free when withdrawing
- Ability to borrow against the cash value of the policy tax-free
- Death benefit is income tax-free
- Estate planning
- Lower commissions: companies make money managing your money for you, rather than selling high-commission insurance products
Life insurance in general also comes with many of these benefits, without the ability to invest in hedge funds and other more aggressive, risky investments.
Drawbacks of Private Placement Life Insurance
There are a few drawbacks to a PPLI:
- Underwriting. 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 selection of securities invested in by the policy. Otherwise, the policy owner will lose the tax-free income growth on the policy as well as pay penalties.
- Structuring fees—typically about 1% of the premium, which is significant, given the size of the investment.
- The benefits of PPLI take years to develop. The initial fees and taxes could exceed any tax benefits in the early years.
If you are not in good health or don’t want to bother with getting a medical exam, you could consider a private placement variable annuity, which are simpler to buy. They’re also less expensive.
Where to buy Private Placement Life Insurance?
Many large companies withdrew from the PPLI market. It is possible to purchase it (assuming you meet the requirements) from Blackrock, Crown Global, Acadia, Investors Preferred, and Zurich.
Another way to buy a PPLI policy is through a digital broker specializing in variable universal life insurance or permanent life insurance in general. One such broker is Amplify. They focus 100% on permanent life insurance and work with several leading life insurance companies. They can help you get and compare several quotes and select the best one for you.
How does It Work?
PPLI’s 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 so that they have access to the accumulated cash value.
There are rules around how much you can contribute, though, because the IRS wants life insurance to act as 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 of the tax advantages.
The investments must comply with certain diversification requirements. It must contain at least five different investments and each investment needs to be weighted so that no one investment dominates the account. Failing in this requirement would mean losing tax advantages of a PPLI.
You don’t have to wait until you’re 59 and a half, as with an IRA, to have access to tax-free cash distribution. You can withdraw or borrow against the cash value tax-free and you don’t have to repay the money. You might want to, though, to maximize the long-term tax-free growth.
How is PPLI Different from Other Life Insurance Policies?
Basically, a PPLI is a variable universal life insurance policy. Where a PPLI is different is in the risk of the investments and the amount of assets held. Variable life insurance investors choose from a limited menu of investments, and they 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.
If it seems to you that PPLI’s are incredibly complex, you would be right. You really need a sophisticated wealth manager or experienced private placement insurance agents 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 probably can 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. A good variable universal life insurance or indexed universal life insurance policy can do some of the same thing, only for us common folk.