If You Could Contribute an Unlimited Amount to a Roth IRA, Would You?

Posted: 4-26-24 | John Vande Guchte MST CPA

Private Placement Life Insurance Now Provides Extensive Investment Selections within a Tax-Favored Environment

Imagine there are no traditional limitations on tax-advantaged savings, allowing for significant opportunities to optimize your financial future. Private Placement Life Insurance (PPLI) allows for this reality. PPLI represents a paradigm shift in wealth management for high-net-worth individuals, offering significant tax advantages for wealth accumulation without the usual restrictions and generic, lack-luster investment options historically available through life insurance vehicles.

Does Life Insurance Make Sense as a Legitimate Investment Vehicle?

I am a Midwesterner, Dutch, and have over two decades of experience as a CPA. To say I am a practical individual and professional skeptic may be an understatement. It is part of the job of being a good CPA. While I believe life insurance is an important component of planning for income replacement, buy-sell coverage, and estate planning, amongst other needs, I have generally been highly skeptical of life insurance as an investment vehicle. These “investment vehicles” generally have average investment options to go along with high fees and commissions. This is not exactly a winning combination.

So, what makes PPLI different? Why is this practical, professional skeptic of a CPA so intrigued by the evolution of PPLI over the past couple of years? In short, certain life insurance companies are now allowing select investment firms who go through a rigorous vetting process to direct the investments inside of these life insurance vehicles. Innovia Wealth is one of these select investment firms. We can choose and oversee the investments made within the PPLI policies, significantly enhancing its appeal.

Our calculus is simple when discussing with our clients whether PPLI might be a good strategy – are the likely income tax savings allowed by the PPLI policy greater than the costs associated with the underlying life insurance policy?

What is Private Placement Life Insurance?

Private Placement Life Insurance (PPLI) is a sophisticated financial product that merges the benefits of life insurance with investment opportunities not typically available in traditional policies. It caters to high-net-worth individuals seeking advanced tax planning and wealth management strategies. With PPLI, policyholders can invest substantial sums of money into customized investment accounts within the insurance policy. This powerful tool offers a seamless integration of insurance and investment components.

What are the advantages of PPLI?

The benefits of PPLI extend beyond traditional life insurance offerings, encompassing a wide array of advantages including:

  • Tax Benefits: PPLI offers significant tax advantages, including tax-deferred growth on investment earnings and tax-free withdrawals or loans against the policy’s cash value.
  • Asset Protection: PPLI policies are held in segregated accounts, shielding accumulated wealth from creditors and legal claims. Moreover, leveraging certain onshore and offshore trusts and ownership structures can provide additional layers of asset protection.
  • Flexibility in Investment Options: While many traditional life insurance products may limit investment choices, PPLI allows a broad array of investment choices. We can invest in a diverse range of assets, including stocks, bonds, ETFs, semi-liquid private investment funds, and traditional capital call structure private investment funds (e.g., equity, credit, real asset).
  • Estate Planning Benefits: PPLI can play a pivotal role in estate planning, facilitating tax-efficient wealth transfer and succession strategies for future generations. When the insured passes away, beneficiaries receive the cash value of the policy tax-free through the death benefit, enabling a multigenerational wealth transfer without estate or capital gains taxes.

How does PPLI work?

Obtaining a PPLI Policy

Private Placement Life Insurance (PPLI) operates uniquely as both an investment vehicle and life insurance coverage for high-net-worth individuals. Individuals should generally have a net worth of at least $15 million and either strong cash flow or liquid net worth of $10 million. Applicants must submit a signed application along with Know Your Customer (KYC) documents and undergo medical and financial underwriting. This process generally involves providing medical records, undergoing a physical exam, and having a licensed insurance agent experienced in PPLI assist in coordinating the application and underwriting processes with the selected carrier.

Structuring a PPLI Policy

Structuring a PPLI policy involves careful consideration of policy ownership and location, as well as premium payments and death benefits, to optimize investment growth and tax deferral benefits. The structuring should involve the assistance of PPLI experts to handle the design and purchase of the life insurance policy, the ongoing administration of the policy, and the selection and oversight of the investments inside of the policy. Other advisors, such as your estate planning attorney and CPA, should also be consulted as part of this process.

Typically, investors should plan to fund the contract with a total of $1-5 million or more in total premiums. These premiums are generally paid over a period of four to five years. In general, PPLI should not represent more than 10-15% of an individual’s overall investable assets. By prioritizing high premiums and a small death benefit, investors can maximize tax-deferred growth within the policy.

In the early years of the policy, there is typically a notable gap between the cash surrender value and the death benefit; however, these values generally converge as the investments grow over time. The goal is to minimize the insurance component and to maximize the tax and compounding benefits of using the PPLI for long-term investing and wealth transfer.

Ownership Structures for PPLI

Leveraging the tax advantages of PPLI often involves strategic considerations regarding ownership structures tailored to individual clients’ tax and estate planning objectives. The choice of ownership entity for a PPLI policy depends on various factors unique to each client’s financial situation. Options range from Irrevocable Life Insurance Trusts and Dynasty Trusts to Charitable Lead Annuity Trusts (CLATs), Family Limited Partnerships (FLPs), and Limited Liability Companies (LLCs). Typically, investors form an LLC, often established in states like Alaska, to be the direct owner of the PPLI policy. This structure helps reduce upfront costs and streamlines management through engaged advisors.

What to consider before investing in PPLI?

Before delving into the intricacies of Private Placement Life Insurance, it’s vital to consider several key factors that can significantly impact its suitability and effectiveness within a financial portfolio. Each play a role in determining the viability of PPLI as a wealth management solution.

  • Eligibility Criteria: PPLI is best suited for high-net-worth individuals with assets in excess of $10 to $15 million. Professional athletes, business owners, and wealthy families may benefit from the flexibility of PPLI, optimizing their wealth accumulation strategies while enjoying the tax benefits and asset protection features offered by these policies.
  • Cost Structure and Fees: PPLI policies typically involve upfront costs and ongoing fees, some of which vary based on factors such as the policy’s cash value, the insured’s age and health, and the net amount at risk. It is crucial to understand the associated expenses and how they compare to the potential income tax costs associated with holding the same investments outside of the PPLI policy.
  • Risks and Drawbacks: Like any investment vehicle, PPLI carries inherent risks, including market volatility and potential policy-related risks. It’s essential to weigh these factors against the benefits offered by PPLI.
  • Compliance Considerations: PPLI policies are subject to regulatory compliance requirements, so it’s essential to work with experienced professionals who can navigate the regulatory landscape effectively.
  • Potential Income Taxes: If you surrender the policy before the death of the insured, then all income generated inside the policy is subject to ordinary income taxes at the time of surrender.

Getting Started with Private Placement Life Insurance

The recent partnership between life insurance companies and seasoned wealth management firms, like Innovia, opens up significant opportunities for high-net-worth individuals to optimize their investment strategies within Private Placement Life Insurance policies. We have proudly been a pioneer in this field as one of the first fifty companies nationwide to offer the expertise and accreditation to leverage these progressive changes.

Want to learn more? Please schedule a call today to explore how PPLI may fit into your specific goals-based financial plan.