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The Affluent Insurance Advisor

Private Placement Life Insurance

Private Placement Life Insurance (PPLI) is a form of permanent life insurance that provides both living benefits and lifetime death benefit coverage. This product is very similar to the retail product known as variable life (hyper link to VL article when I write it) -- another permanent life insurance product in which performance is driven by its underlying retail mutual funds (insurance dedicated fund-IDF).

The cash value is placed in a separate account and invested by the investment options made available by the insurance carrier. In PPLI, these investment managers have been hand-picked by its policy owners -- usually constructed by them with managers they wanted instead of just the generic list provided by the insurance carrier. Provided that the PPLI policy is constructed within the IRS guidelines, it can be a very powerful vehicle in that it can minimize taxes to the owner's family.

The construction of this product is significantly more complicated to the purchaser. Purchasing PPLI is not as easy as pulling a pre-constructed and approved product off the shelf from a retail insurer.

There is a fair amount of customization involved. The process starts by working with a licensed insurance broker to determine the appropriate PPLI policy and selecting an insurance carrier (not many carriers play in this marketplace). The insurance carrier underwrites and issues the PPLI policy. We typically see the premiums being paid over 5 years in order of the policy to qualify for favorable tax treatment on withdrawals and loans from the policy. The insurance carrier and broker oversee the entire process and continue to monitor the account.

As mentioned earlier, the funds contributed to these policies invest into, what are known as, Insurance Dedicated Funds (IDF). There are specific rules that don't allow the assets to be controlled by the policyholder, thus the IDF is managed by an independent investment manager on behalf of the insurance carrier. Any investment gains will not be subject to income tax. These IDFs must comply with the IRS's investor control doctrine and diversification requirement. The investor control doctrine prohibits the policyholder from influencing the IDF's investment decisions, while the diversification requirement dictates that the IDF must have at least 5 different underlying investments which meet specific portfolio percentages.

A common concern that arises during the construction of PPLI policies is that of fees. The fees associated with this particular product include:

  • Premium based fee: up front structuring fees paid to the broker
  • Asset management fee: cost of insurance and the broker and carrier fee
  • Fund management and operating expenses
  • Deferred Acquisition Cost: a federal tax
  • State premium tax

While the above-mentioned list of fees seems to add up, should the underlying IDFs in the insurance policy's sub-account perform well, significant tax deferral could significantly help the account. It is common to see ultra-high net worth individuals utilize this vehicle for hedge fund type instruments which are prone to short term gains taxed at ordinary income tax rates.