PPLI: Private Placement Life Insurance [Ultimate Guide]
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Contents
- PPLI in a Nutshell
- What makes PPLI so powerful?
- Who Needs PPLI?
- How PPLI fits into Wealth Protection planning
- The Unique Benefits of PPLI
- Disadvantages
- Types of PPLI: Domestic vs. Offshore / International
- A Common Misconception: PPLI is Only for the Ultra-Wealthy
- The History and Evolution of Private Placement Life Insurance
- The Key Components of PPLI
- The Policy Blueprint and Mechanics
- Here's how people use Private Placement Life Insurance Policies
- The Road Ahead: Future Trends in PPLI
- PPLI Fees
- Frequently Asked Questions
- How to Get Started with PPLI
When I was first introduced to Private Placement Life Insurance (PPLI) back in 2010, I didn’t think it possible. It promised extremely strong asset protection, estate and legacy planning benefits, and a legal way to grow millions of dollars in a tax-deferred (and sometimes even tax-free) way.
And yet, after doing a lot of research, I learned that PPLI could do all that.
The trouble is, there’s a lot of bad information about it out there. Some people oversell the benefits. Others downplay the importance and careful planning needed to keep PPLI compliant with tax law. A few clearly don’t understand what they’re talking about.
This article is designed to give you a balanced case of the opportunity and the complexity of PPLI policies. After reading, if you have any questions about whether it’s right for you, feel free to book in a free no-obligation consultation with one of our Associates to see if PPLI could work for you.
PPLI in a Nutshell
Private Placement Life Insurance (PPLI) is a sophisticated financial tool designed for high-net-worth individuals. It combines the elements of a Variable Universal Life insurance policy with tailored investment opportunities.
In some ways, it’s like the Swiss Army knife of financial planning—capable of delivering both wealth protection, privacy, and growth under one umbrella.
What makes PPLI so powerful?
In the planning world, PPLI stands out for several compelling reasons. First, it offers very strong asset protection for your hard-earned money; it may be the single strongest asset protection tool on the market.
Second, it gives you a level of investment flexibility that traditional policies simply can’t match. You can use it to hold virtually any asset, anywhere, with very few investment limits like regular retirement accounts.
Third, if structured correctly, it’s extremely tax efficient. You can use it to defer tax on investment gains almost indefinitely, and legally avoid estate tax to your heirs. But — and I can’t stress this enough — you must set up and maintain PPLI properly to get these benefits.
Who Needs PPLI?
PPLI is not for everyone. It’s built for high-net-worth individuals and families who (usually) have at least a few million dollars in investible assets (i.e. excluding primary residence).
Because of its asset protection value, it’s especially good for business owners and high-income professionals who are naturally more at risk of a lawsuit and are looking to protect their wealth in a tax-efficient way.
Some of our clients have expressed concern over capital controls. Structured properly, PPLI moves your investments into a very protective tool that can be moved offshore and out of harm’s way.
For investors with many different assets in different places, private placement life insurance can also serve as a foundation to pass assets to your heirs with no estate tax or time-consuming probate.
How PPLI fits into Wealth Protection planning
Later I’ll talk about some specific examples of how PPLI works in practice. But here are some highlights.
Tax-Efficient Wealth Building: Build wealth more quickly through indefinite deferral of taxes within the policy.
Estate Planning and Wealth Transfer: If structured properly, you can transfer a large estate to your heirs without triggering estate taxes.
Asset Protection: For high-risk clients (business owners, professionals and real estate investors), protects assets from creditors and legal claims.
International Tax Planning: Flexibility to hold assets in multiple jurisdictions in a very streamlined way.
Philanthropic Goals: Ensure more of your money goes to charities you care about in a tax-efficient way.
Estate Liquidity for Illiquid Assets: Provides liquidity to pay estate taxes without selling illiquid assets at a discount; smooths the transfer of valuable assets like real estate or family business to heirs.
The Unique Benefits of PPLI
Like any term or whole life policy, PPLI offers a death benefit for your loved ones. But for high-net-worth families, Private Placement Life Insurance Policies offers some unique benefits.
It can hold almost any investment
A standard term insurance contract isn’t generally designed as a way to earn a return. Traditional whole life policies offer long-term growth, along with tax advantages, but generally limit the types of investments you can hold.
For most Americans, this isn’t really a problem. But for high-net-worth-individuals (HNWIs) that may hold lots of different alternative assets — domestically and internationally — standard policies won’t work as well. PPLI is a better option.
Asset Protection
PPLI provides a very effective layer of asset protection. In many places (including the US), assets within a life insurance policy are shielded from creditors, lawsuits, and other legal claims. That’s especially true if the policy is owned by a trust (as it almost always is in the case of PPLI).
For higher risk clients like business owners, high-income professionals, and real estate investors, you can use a PPLI to protect your nest egg.
Legacy and Estate Planning
PPLI is a potent estate planning tool because it allows you to legally move a chunk of your assets out of your estate and out of the reach of estate taxes.
In 2024, the estate tax exemption is $13,610,000 (or $27,200,000 for married couples). But the higher limits that were brought in with the 2017 Tax Cuts and Jobs Act are set to expire after 2025 unless Congress takes action.
If that doesn’t happen, the exemption will drop by half and expose your estate to a tax rate of up to 40% on any amount not covered by the exemption.
Beyond that, PPLI also helps you avoid the privacy-invading process of probate entirely.
(Although, to be fair, there are plenty of options under US law to avoid probate, not least of which is a plain jane living trust.)
Privacy and Confidentiality
In a world where financial privacy is rare, PPLI stands out. The funds paid into a policy effectively become invisible to prying eyes – although not to the IRS.
Global Wealth Mobility
For those with international assets, PPLI offers a lot flexibility. It allows you to manage and grow your wealth across borders in a streamlined way that’s virtually impossible any other way.
Diversification and Risk Management
PPLI provides a unique opportunity to diversify investments across a range of asset classes and geographical locations. This diversification helps you better manage risk, limit potential losses, and enjoy a more stable portfolio.
Tax Efficiency
You might be surprised that the main reason clients look at PPLI is not for the tax deferral. Although it is certainly a nice side-benefit.
Basically, all investments within the policy grow tax-free. Over time and with compounding interest, that can make a huge difference in the value of those assets inside.
The death benefit to your beneficiaries is also received tax-free.
Not only that, but under certain conditions, the amount you move into the policy itself is tax-deductible. (This is especially true for business owners who have a corporation or LLC taxed as a corporation, and have a large amount of retained earnings in the company.)
However, you might expect that Uncle Sam does not smile kindly on the idea that Americans can legally reduce their tax burden willy nilly. You’d be right.
As a result, they’ve created some very complicated rules around the use of this structure. You must follow those rules to the letter no ifs, ands, or buts.
Disadvantages
Lack of Liquidity
PPLI policies are generally designed for long-term investment so liquidity can be an issue. As one advisor put it to me: “PPLIs are best for the gravy of an estate.”
In other words, it’s best for wealth that you won’t need back for a while, or, if for estate planning purposes, ever.
(That said, many policies give you the option to borrow against the policy, helping you use the value when you need it. But because you have to borrow it back at market rates, that’s not always attractive.)
Fees
Setting up a PPLI will cost at least $10,000 and up to $50,000 (or sometimes more depending on complexity). Annual maintenance costs can be five-figures as well.
Over a few million dollars, it’s a low burden. But that makes it unsuitable for smaller investments.
Control Issues
Under IRS guidelines called the Investor Control Doctrine, you can’t put funds into a PPLI and then have direct control over the investments within the policy. Instead, you (or, more accurately, the insurance company that holds your policy) must hire a professional investment manager to manage on your behalf.
You can make suggestions, but they don’t have to follow them. Instead, they must treat you like they would any traditional investment client — respect your overall wishes and objectives within your investment risk tolerance.
Regulatory Compliance
Keeping on top of changing rules and regulations is very important. PPLI providers have expertise and time to ensure compliance with both US and international laws.
Harder to Bank
A PPLI is usually owned by a trust and may include structures that own specific investments. Under certain circumstances, it can be difficult to get a bank account for these structures.
Types of PPLI: Domestic vs. Offshore / International
Private Placement Life Insurance (PPLI) comes in two main types: domestic and offshore.
Domestic PPLI: Issued within the US and follows US tax laws. It offers the benefits of PPLI but is compliant with US regulations, making it straightforward for US clients.
Offshore PPLI: Issued in jurisdictions known for favorable tax and regulatory conditions, such as Bermuda, the Turks & Caicos Islands, or the Cayman Islands. While offshore PPLI can offer tax advantages and investment flexibility, US clients must still follow all US tax laws, adding a layer of complexity.
The choice between domestic and offshore PPLI depends on the individual client’s needs and circumstances. Each option has unique advantages and potential challenges, and the best choice should be determined on a case-by-case basis.
A Common Misconception: PPLI is Only for the Ultra-Wealthy
Many believe that Private Placement Life Insurance is only for the ultra-wealthy. While PPLI is designed for high-net-worth individuals and families, it’s more accessible than you might think.
Initial premiums typically start at around $1 million, though some providers may require $2 million to $5 million.
It’s especially beneficial for those with a net worth of $5 million to $10 million, ensuring they can meet premium requirements and enjoy benefits like tax efficiency, asset protection, and investment flexibility.
So, while PPLI is aimed at affluent clients, it’s not just for the very, very rich. It can be made to work for a broader range of wealthy individuals.
The History and Evolution of Private Placement Life Insurance
To understand where PPLI fits in to the overall wealth protection and investment landscape, it helps to understand where it came from.
The Birth of PPLI
PPLI first emerged as a niche financial product in the 1980s, aimed at wealthy individuals seeking more control over their investments while enjoying the benefits of life insurance.
Financial advisors began to recognize the potential and brought it to their clients.
1990s: From Whispers to Roars
PPLI started gaining traction. Financial institutions began offering more sophisticated products, and high-net-worth individuals increasingly adopted PPLI as part of their financial planning strategies.
The New Millennium: Regulation and Growth
The 2000s brought increased regulatory scrutiny, especially around tax compliance. The rules were tightened and certain restrictions and regulations brought in to prevent people from abusing them.
Despite this, PPLI continued to grow in popularity, thanks to strong benefits and ability to adapt to a changing world.
Today and Beyond: Global Expansion and Future Trends
Today, PPLI is a well-established tool in the wealth management arsenal. As things become more uncertain and unstable, PPLI will continue to adapt and offer new opportunities to savvy investors.
The Key Components of PPLI
The technical side of Private Placement Life Insurance is quite complicated and not something you do on your own.
Still, to help you better understand how it works, it’s important to get a handle on the basics.
The Policy Blueprint and Mechanics
The policy itself is a life insurance contract with an insurance company, which can be domestic or international.
You go through a process to get insured and then the insurance company will issue you a policy. You must be generally healthy and there are rules and regulations on the size of the policy that can be issued based on certain qualification factors.
That said, there’s usually a lot more flexibility than you would get at a regular insurance company because their risk is limited. You’re funding the policy. When you pass away, you get the premiums back plus the gains on the investments held within over the life of the policy.
Once you qualify, a policy will then be issued, which you pay. Smaller PPLI policies can start at $1 Million. Larger, more sophisticated ones will start at $2,000,000 to $5,000,000.
Depending on the size of the mandate, sometimes a holding company is set up within the PPLI to further segregate your assets from other policyholder assets.
If a holding company is needed, it will be managed by professional managers. The investments will also be managed by professional investment managers. To comply with the rules, you cannot have any direct control over the investments. You can make suggestions, but the investment managers don’t need to listen to you.
In some places, those managers will be held to a fiduciary standard, meaning that they are legally obligated to put their client’s interests above their own. In other places, they may not be. That’s why it’s critical to work with a group you trust.
Here's how people use Private Placement Life Insurance Policies
Flexibility is one of the biggest benefits to PPLI. Here are some real-life uses for such strategies.
Please note that these are not recommendations. The suggestions below are purely as illustration and any of these set ups may or may not be the right fit for you.
Scenario 1: Tax-Efficient Wealth Building
Profile: A successful entrepreneur with a high annual income and significant taxable investments.
Objective: Minimize taxes on investment gains and build wealth efficiently.
Strategy:
The entrepreneur, as the insured person, forms a life insurance trust and puts $5 million into it in a series of payments.
The trust purchases a PPLI policy.
The funds are invested in a diversified portfolio, including stocks, bonds, and alternative investments like hedge funds.
Investment growth within the PPLI policy is tax-deferred.
Upon the entrepreneur’s death, the beneficiaries receive the death benefit, which includes the initial premiums plus any gains from the investments made within the policy. Payments are made from the trust, not the entrepreneur’s estate. This makes both the death benefit and all investment gains free of both income and estate tax.
Scenario 2: Estate Planning and Wealth Transfer
Profile: A wealthy individual wants to transfer wealth to the next generation with minimal (or no) estate taxes.
Objective: Efficiently transfer wealth to heirs and reduce estate tax liabilities.
Strategy:
The individual forms a life insurance trust and donates $10 million to it.
The trust purchases a PPLI policy with a premium of $10 million in a series of payments, with the individual as the insured.
The investments within the policy grow tax-deferred.
Upon the death of the insured, the death benefit is paid out to the trust, providing tax-free proceeds to the heirs.
The family can borrow against the policy’s cash value for additional financial flexibility.
Scenario 3: Asset Protection
Profile: A high-net-worth individual with substantial personal and business assets at risk of potential legal claims.
Objective: Protect assets from creditors and legal judgments.
Strategy:
The individual, as the insured, transfers $3 million into a PPLI policy.
The PPLI policy is structured under a holding company in a jurisdiction with strong asset protection laws.
The investments within the policy are shielded from creditors due to the legal protections afforded to life insurance policies.
This ensures that the individual’s wealth is safeguarded from potential lawsuits and claims.
Scenario 4: International Tax Planning
Profile: An expat executive with investments and financial interests in multiple countries.
Objective: Optimize tax efficiency and manage international tax obligations.
Strategy:
The executive invests $2 million into an offshore PPLI policy, with the executive as the insured.
The policy allows the executive to invest in a global portfolio, including international equities and bonds.
Investment gains are tax-deferred within the policy.
The policy is structured to comply with tax regulations in the US, minimizing double taxation.
Upon death, the policy’s death benefit provides tax-free proceeds to beneficiaries. However, since a trust doesn’t own the PPLI policy, some of the proceeds may be subject to estate tax.
Scenario 5: Philanthropic Goals
Profile: A philanthropist wants to support charitable causes while maintaining financial flexibility.
Objective: Use life insurance to fund charitable donations in a tax-efficient manner.
Strategy:
The philanthropist funds a PPLI policy with $4 million, with the philanthropist as the insured.
The policy is structured with the philanthropist as the insured and a charitable organization as the beneficiary.
The investments grow tax-deferred within the policy.
Upon the philanthropist’s death, the death benefit and investment gains are paid out tax-free to the charity or charities.
During their lifetime, the philanthropist can borrow against the policy’s cash value to fund additional philanthropic activities or personal needs.
The Road Ahead: Future Trends in PPLI
Integration with Tech Platforms
Although finance was a little late to the dance, financial technology (fintech) companies are bringing transparency to the way clients are able to monitor and interact with their investments.
I haven’t personally seen anything yet designed to change PPLI policies themselves, but the broader trends of transparency, better management, and better insights are applying to them ever more often.
Evolving Tax Environments
As global tax environments shift, PPLI policies must continually adapt to stay compliant.
Sophisticated Risk Management Tools
Advanced risk management tools are becoming a standard feature of PPLI policies. These tools help to identify potential risks and implement strategies to mitigate them.
Cross-Border Collaborations
From a logistical and technology perspective, it’s easier than ever to set up international PPLI policies.
PPLI Fees
PPLI isn’t cheap, but it’s not prohibitively expensive either. The cost can be broken down into premiums, administrative fees, and investment management fees. While the initial outlay might seem high, the long-term benefits often justify the expense. It’s essential to weigh these costs against the potential advantages.
Generally, there are three parts:
#1: Set up.
There will be various fees involved in setting up your PPLI policy in the first place. That includes various administrative fees, legal and tax advisory fees, and actuarial fees. This is often a one-time charge that can range from $10,000 to $50,000, depending on complexity.
#2: The premium itself.
That will depend more on you than the insurance company, although there are rules to follow here in terms of setting the premium amount.
#3: Ongoing Fees.
Most of the time, there’s an administrative fee, which is sometimes structured as a percentage (1.5-2.0% of the policy value is average) or can be a flat fee. Investments managed within will also be subject to an asset management fee (typically 1.0-1.5%).
The three models we see the most are:
Flat fee: All fees are included for a set annual fee. This one isn’t that common because it shifts risk to the advisor. However, for smaller clients with a simple PPLI, it might be an option.
Flat fee + disbursement: The advisor charges a base flat fee and additional fees for any expenses they take on for the benefit of the client (i.e. the disbursements).
A percentage: The advisor charges a flat percentage of the assets under management.
Some firms will do a hybrid of this model.
Frequently Asked Questions
What is Private Placement Life Insurance (PPLI)?
PPLI is a specialized life insurance policy designed for high-net-worth individuals. It combines life insurance with investment options. It offers asset protection, privacy, estate planning advantages, and tax benefits.
Who is Private Placement Life Insurance for?
PPLI works best for high-net-worth individuals and families with at least $1 Million to put into the policy.
Is it only for ultra-wealthy people?
Although this is certainly designed for wealthier people, you don’t need to be “wealthy” to make use of it. We generally recommend clients be able to put in $1,000,000 for it to be viable.
What are the main benefits of PPLI?
Life insurance with investment options, very strong asset protection for high-risk clients, estate planning opportunities, and tax benefits.
Are there any downsides to PPLI?
While PPLI offers numerous benefits, it also comes with higher initial costs and complexity. You need to work with experienced professionals.
How does PPLI differ from traditional life insurance?
Unlike traditional life insurance, PPLI allows for a wide range of investment options, estate planning, and can offer tax benefits. It’s more flexible and can be customized to suit your individual needs.
How do I get started with a PPLI policy?
The best place to start is a free, no-obligation consultation with a Nestmann Associate to see how a PPLI might fit into your overall wealth protection plan. They will also be able to give you a sense of whether it might work in your situation.
Can I tap into my PPLI policy if I need the money?
Yes, many PPLI policies offer features that allow for partial withdrawals or loans against the policy’s value. This provides liquidity in times of need.
That said, we don’t recommend clients get into this with the expectation they will be able to just pull their money back out whenever they want. It’s best seen as a long-term investment.
How much control do I have over investments within a PPLI?
For compliance reasons, you have to be willing to give control of your investments within the PPLI to a professional investment manager. You can make suggestions, but the manager is under no obligation to listen to you. They do generally have to work in your best interests, however.
How does PPLI compare to retirement accounts?
They offer similar benefits but with some big differences.
Tax Treatment
Traditional retirement accounts can be either tax-deferred or tax-free on the gain. Normal PPLI policies are funded with after-tax money. The investments grow inside tax-deferred. The gains can be structured to be tax-free.
Investment Caps
Contributions to all types of retirement accounts are capped at some level. PPLI policies are only limited by the willingness of an insurance company to create a contact of a certain size, which is substantially more than what you can do with a regular retirement account.
Investment Flexibility
Most retirement accounts give you very limited options on what you can invest in (stocks, bonds, some funds, maybe crypto). If you want more options, you can set up a self-directed account. However, that comes with the risk of prohibited transactions that can cause a partial or complete “blow up” of your investment account.
PPLI policies can invest in almost anything.
Control
Generally, you control your retirement account. With a PPLI, you must be willing to give day-to-day control of your assets to a professional investment manager who can listen to your wishes, but doesn’t actually have to follow your requests.
Liquidity
Although there are ways around it, it’s best to assume that money you put into a PPLI policy is there for the long-term, and will be hard to pull out.
You can always liquidate your retirement accounts (and, at a certain age, you must). Of course, anything pulled out of a traditional account will be taxed at that time.
Asset Protection
Retirement accounts (especially IRAs) have a mixed record as a safe place to protect your assets. PPLI policies, especially those created outside the US, offer exceptionally strong asset protection.
Compliance Issues
PPLI policies require regular attention to stay compliant to changing rules and regulations. Retirement accounts do as well, but not to the same degree.
Fees
Retirement accounts are cheap and easy to set up. PPLIs carry higher absolute fees with the potential to more than cover the cost with extra investment growth within the policy. That’s the primary reason this sort of product is best suited to high-net-worth families and individuals.
How to Get Started with PPLI
As mentioned throughout this article, this is not something you want to do on your own. Yes, there are lots of benefits from asset protection and estate planning to privacy and tax opportunities. But they are also complex and require a steady hand and a keen eye to keep them compliant.
If you’re interested in PPLI and you’d like to know how it might fit into your wealth protection plan, please feel free to book in a call with one of our Associates. You can do that here.
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