Private Placement Life Insurance: An Overview

Private placement life insurance (PPLI) is a sophisticated life insurance product that offers death benefit protection while also providing access to a variety of registered and non-registered investments that are accessible solely within the life insurance policy structure. Interest in PPLI has risen recently because its unique features make it attractive during periods of increased tax uncertainty and market volatility. Those interested in planning with PPLI, however, should be aware that there are substantial financial thresholds, investment profiles and liquidity requirements that must be met. Ensuring the appropriateness of the planning for the individual and family as well as proper implementation and maintenance of the PPLI policy are also critical, particularly as the use of PPLI planning for high net worth families has recently come under scrutiny.

PPLI Defined

PPLI is a form of “permanent” variable universal life (or VUL) insurance providing both death benefit protection and a cash value component that accumulates investment growth within the policy. Premiums paid in excess of the cost for the death benefit coverage are credited to, and grow as part of, the policy’s cash value. VUL policies enhance this investment feature by permitting policy owners to direct the allocation of the policy’s cash value among various investment options managed by third-party advisers. 
The key factor distinguishing PPLI policies from conventional VUL policies (those available to the general public) is the range of investment options. While insurance carriers provide limited investment choices for conventional VUL policies, with PPLI insurance, the policy owner can select from a wider array of investment options, including actively managed accounts, hedge funds (including “funds of funds”) and alternative assets (for example, credit products, private equity, real estate funds, commodities, currencies and non-correlated investments). In addition, U.S. life insurance companies often limit the maximum amounts of coverage for their conventional life insurance policies, which may not offer sufficient death benefit protection for a high net worth family. PPLI policies can be designed to achieve the desired amount of death benefit coverage and provide these investment opportunities.

Planning Profile

PPLI insurance typically will not make sense for families focused solely on more traditional or guaranteed death benefit protection, since the future availability of death benefits is closely tied to the PPLI policy’s investment performance. It tends to appeal to high net worth individuals who are insurable, have a desire or need for significant death benefit coverage and want the flexibility in investments offered in the policy to maintain that death benefit protection for the individual’s family. Accordingly, most PPLI insurance purchasers meet the following profile:

• A net worth of $20 million or more, with significant liquid assets ($10 million or more) and annual income to cover expected and/or desired living expenses.
• The ability to fund at least $1 million (more likely, $3 million to $5 million) in annual premiums for several years (generally, aggregating more than $5 million in total investment) as well as additional costs for implementation and ongoing administration of the PPLI policy structure.
• A desire for significant investment in alternative asset classes, with an investment horizon generally of at least 10 – 15 years.
• Prior experience with the implementation and optimization of other estate planning strategies.

Features of PPLI Insurance

As with conventional variable universal life products, PPLI contracts are highly regulated and must comply with state insurance department regulations and qualify as “life insurance” under the Internal Revenue Code (IRC). Assuming they are treated as life insurance, the following apply to PPLI contracts: 

Tax treatment. Currently, the tax rules generally applicable to life insurance contracts also apply to PPLI contracts, including:

• Investment earnings within the policy are not subject to tax as earned or realized. 
• Cash values can be transferred between investments without taxation.
• Depending on the policy’s structure, policy loans and withdrawals of cash value (up to the owner’s tax basis in the policy—usually the premiums paid) are generally not subject to current income tax, unless the policy is a modified endowment contract (MEC), which is discussed below. 
• Policy death benefits generally are not subject to income tax.

Investment options. Investment options can be customized based on the objectives of the policy owner, who may be able to add a particular investment manager to an insurance carrier’s platform through the creation of an “insurance-dedicated fund” or “separate account” approved by the insurance company. 

Flexibility. PPLI insurance offers flexibility on the timing and amount of premium payments and the amount of death benefit protection. 

Customized cost structure. Typical costs associated with PPLI (as well as VUL) insurance products include commissions, mortality and expense charges, investment management fees and the cost of insurance protection (which can be higher relative to death benefit needs), although a lower overall cost structure often can be negotiated as part of the PPLI policy design. The federal deferred acquisition costs tax (up to 1% to 1.5% of premiums paid) and state premium taxes (from less than 1% to 3.5% of premiums paid) also apply to both PPLI and VUL products, although state premium taxes may be managed by selecting a lower (or zero) premium tax state in which to issue the policy. 

Estate planning. As with conventional life insurance, holding a PPLI policy through a properly structured irrevocable life insurance trust may protect the policy proceeds from estate and generation-skipping transfer (GST) taxes. 

Simplified tax reporting. K-1s are not required for alternative investments made through a PPLI policy.

Planning Considerations

Code requirements. PPLI insurance must satisfy several IRC requirements to qualify as life insurance and fall under the tax rules discussed above. In addition, certain limits apply to tax-free cash value withdrawals, generally in the first 15 years of a policy, so policy owners should anticipate a potentially extended horizon before making withdrawals. 

MEC status. The favorable tax rules for policy loans and withdrawals will not apply if the PPLI policy is or becomes an MEC under the Code; generally, these are policies where most of the premiums are paid in the first four to seven years of the contract. If non-MEC status is desired, then premium payments for the PPLI policy must be carefully structured and monitored.

Investment risk. PPLI insurance does not provide any guaranteed return, leaving the policy owner with all the investment risk. At a minimum, the owner must pay enough premiums and/or the separate account investments must perform sufficiently to provide adequate cash value to cover the associated insurance costs or the policy will lapse, potentially generating adverse tax consequences. 

SEC regulation. Since PPLI products are not registered under any securities laws, purchasers must meet the “accredited investor” and/or “qualified purchaser” requirements under applicable Securities and Exchange Commission (SEC) regulations. These regulations impose significant net worth and/or annual income thresholds, among other requirements, to ensure that the purchasers can demonstrate they have the business or financial experience needed to understand what they are buying and can tolerate the associated product risks.

Investor control. PPLI investment options must be offered only through the purchase of life insurance (i.e., not made available directly to the general public) and comply with the “investor control doctrine,” which limits the policy owner’s and/or the insured’s control over the policy investments, including the following: 

• There can be no arrangement, plan or agreement between the policyowner/insured and the investment adviser regarding the availability of specific investment strategies on the carrier-provided investment platform and/or the availability or selection of specific assets for investment. 
• While the policy owner can choose among investment strategies made available on the insurance carrier’s platform, neither the policy owner nor the insured can influence their execution or select or recommend particular investments or investment tactics.
• Other than the policy owner’s right to allocate premiums among the carrier-provided investment options, the investment advisers (as selected and hired by the insurance company, in its sole discretion) have complete discretion over all investment decisions. 

Diversification. The Code requires that the PPLI policy’s separate account be adequately diversified. Generally, each separate account must contain at least five investments and meet other diversification tests, including that no more than 55% of the separate account may be represented by any one investment. 

Premium funding. The funding of PPLI insurance involves significant premiums in the initial policy years (structured as needed to avoid MEC status) to help boost cash value performance and eventually allow cash value growth to cover the associated annual expenses and insurance costs. If an irrevocable trust owns the PPLI policy, premium funding will require careful planning to address gift taxes associated with premium contributions, as the required cumulative premiums can quickly exceed available federal gift and GST tax exemptions (currently set at $12.06 million).

Ongoing maintenance. PPLI insurance is not a “set it and forget” proposition. There are initial and ongoing expenses relative to the policy’s design, implementation and maintenance, including for accountants, attorneys and other service providers who assist in the process. 

Medical underwriting. PPLI insurance requires the insured to complete extensive financial and medical underwriting requirements to determine insurability.

Recent Scrutiny

In August and September, Sen. Ron Wyden, D-Ore., chair of the Senate Finance Committee, wrote letters to several life insurance companies that issue PPLI policies to gather information about the PPLI market. His letters stated that he is “conducting an investigation into the use of PPLI policies and other loopholes exploited by the wealthiest 1% of Americans to avoid paying their fair share in taxes.” Wyden’s investigation appears to be focused on tax policy and the potential for abuse in PPLI planning, which may have arisen primarily from the 2021 investigation into Swiss Life, a Swiss life insurance company. Swiss Life later pleaded guilty to using PPLI policies and related investment accounts to help U.S. taxpayers conceal ownership of assets offshore and evade paying U.S. taxes. 

As the investigation is ongoing, it is not clear whether the Senate Finance Committee will take any action or whether any legislation will follow. Although Swiss Life is an example of an abuse, it involved a non-U.S. life insurance company that was hiding assets. PPLI policies issued by U.S. insurers are highly regulated, and both case law and the Code impose numerous requirements for PPLI policies to qualify as life insurance, which would address several of the concerns expressed by Sen. Wyden. 

Bottom Line: PPLI Is Not For Everyone

In light of the ongoing tax and market uncertainty, PPLI is not for everyone. It is a complex life insurance product that requires financial sophistication and significant risk tolerance of the policy owner. For those who meet the requirements and are willing to undertake the proper implementation and administration, PPLI insurance may provide desired death benefit protection along with more investment flexibility in the policy to maintain that protection, but the trade-offs are the loss of investment control, various limitations on the timing and amount of access to cash values (even through policy loans) and potentially severe adverse tax consequences if the policy’s parameters do not comply with the Code.