Ten years ago, as many as 63% of Americans had purchased a life insurance policy. Today, that number has dropped all the way down to just 52%. That represents more than a hundred million people going about their lives without life insurance, exposed to all the potential complications and liabilities that come with an unforeseen accident or death.
Why the drop? The sheer diversity of policy options and consumer misconceptions about life insurance, in general, is the primary driver of this trend. It’s easy to get confused about the diversity of life insurance policy options, especially in terms of:
- What are they and how do they work (or don’t work)?
- Who should buy one and why?
- What kind of coverage do you need for what kind of situation?
- The cost of different policies
Private placement life insurance is one such type of policy. Most often reserved for ultra-high net worth individuals, recent changes to the IRS tax code have made it more attractive for a greater number of investors, although the regulatory climate surrounding PPLI remains stiff. But if you do meet the requirements, it might be a good option to consider.
Who Typically Uses Private Placement Life Insurance?
Private placement life insurance is a form of cash value universal life insurance that is offered privately. Policyholders traditionally have annual incomes in the millions and net worths in the tens of millions. These individuals fall into a high tax bracket and may have concerns about estate taxes. They also are typically interested in mutual fund and hedge fund investment but are concerned about the tax implications of doing so in their own name.
PPLI insurance can offer protection from high capital gain taxes and high taxes that can arise even from ordinary income. Because this form of life insurance is not typically offered through the open market, it’s a good idea to get more information from companies that offer private placement life insurance policies before trying to purchase one.
Why Is Private Placement Life Insurance Used for Tax Shielding and Benefits?
The most common reason for using PPLI is to shelter assets from creditors and lawsuits. By placing the funds in an irrevocable trust outside your name, you can protect your wealth even if you’re faced with legal action, making it an attractive option to add to an investment portfolio.
It can also be used as a tax-deferred savings vehicle to expand a family’s wealth, allowing them to borrow against their policy when they need it, while still maintaining ownership over it. This allows the insured person to enjoy all the benefits of having an additional asset, without giving up any control over it until they choose which beneficiary should receive its payout upon death or maturity.
Who Does Private Placement Life Insurance Not Fit?
PPLI is designed with the wealthy investor in mind. Many people who invest in PPLI have a net worth of at least $20 million. Whereas other life insurance policies invest in more stable assets like index funds and bonds, PPLI turns its attention to stocks and hedge funds. PPLI holders are exposed to all the potential upsides of alternative investments along with their risks.
As such, the plan is not for those who simply want to protect their families’ financial security in the safest, most secure way they can.
What Risks Are Associated With Private Placement Life Insurance?
Simply put, the risk of investing in PPLI is that the policy will not pay out. This can happen if a company goes bankrupt or becomes insolvent before your policy matures. In such cases, some or all money invested in PPLI may be lost.
In addition, PPLI holders must know how to exercise some discernment as investors. While funds invested into a PPLI aren’t wholly illiquid, the success of the investment does depend on their presence and continued accrual. You can’t expect to withdraw or borrow too much against the policy because the entire investment could start to underperform. Do it one too many times, and the PPLI could be at risk of collapse.
Moreover, PPLIs come with a number of fees, including annual fees and mortality charges. These charges can eat away at your policy’s returns over time, especially if you’re borrowing from your policy regularly, and may make it less appealing than other types of investments.
How Is Private Placement Life Insurance Used?
PPLI is a specialized form of permanent life insurance that can be used to shield capital gains, income, and estate taxes. It is also a way to have better bankruptcy or lawsuit protection, as well as becoming a tax-deferred savings vehicle when implemented correctly.
High net worth investors use PPLIs to broaden their exposure to alternative investments, while using life insurance as an investment vehicle. Instead of using more “shelf stable” assets for life insurance, they can use PPLI to get access to hedge funds without having to liquidate their existing investments to purchase them. The investor then has the ability to shift his or her portfolio by owning both alternative investments (mutual and hedge funds) and PPLI policies that protect against losses through death benefits paid out at the time of death or disability.
What Are the Qualifications Required for Purchasing PPLI?
The Securities and Exchange Commission considers PPLIs as unregistered securities products. This means that purchasers must first qualify as accredited investors. Being an accredited investor is the baseline qualification for buying PPLI, which indicates that you will have a minimum annual income of $200,000, or a net worth of $1 million in order to purchase an insurance policy. However, this isn’t the only consideration.
In order to be successful and allow its cash value to exceed the cost of insurance, PPLI holders will often need to make substantial contributions to the policy in its first few years. The typical PPLI holder is someone with a high net worth, who already has a number of investment options in their portfolio and desires more exposure to tax saving investments.
The Bottom Line
While PPLI isn’t for everyone, it is a unique financial product that offers exposure to a wide range of asset classes not available with typical investment vehicles. If you are in the right situation and have a natural affinity for alternative investments, contact a qualified agency to learn more about whether PPLI is right for you.
