How affluent individuals and families use PPLI for legacy planning

By Jay C. Judas

In recent years, private placement life insurance has emerged as a strategic tool for affluent individuals and families looking to optimize their investment strategies and enhance their wealth planning.

The 2024 PPLI Market Report, researched and written by Life Insurance Strategies Group and Lion Street, reveals that new annual policy premiums for PPLI more than doubled after the enactment of Consolidation Appropriations Act of 2021. This law changed the definition of life insurance to permit, in most situations, for accumulation life insurance policies to receive upward of more than two times the amount of premium for the same required amount of death benefit. In effect, this “supercharged” the wealth planning benefits of PPLI.

This financial product is available only to qualified purchasers and accredited investors. It offers a range of benefits that cater specifically to the unique needs of high net worth individuals. For many, PPLI is a singular tool that combines both tax-efficient investment growth with legacy planning.

What is PPLI?

PPLI is a variable life insurance policy designed for affluent clients involved in wealth and estate planning. Unlike traditional life insurance policies, PPLI allows policyholders to invest in a variety of highly tax-inefficient assets - including alternative assets, private equity and real estate - within the structure of an insurance policy. These investments grow tax-deferred, and the death benefit is typically paid out income tax-free to beneficiaries.

Turning tax-inefficient investments into tax-efficient ones

Affluent individuals often have substantial investments in assets that can generate significant taxable income. These include hedge funds and private equity, which can produce high levels of ordinary income and short-term capital gains, subjecting investors to high tax rates. By incorporating these assets into a PPLI policy, investors can significantly reduce their tax liabilities through several product benefits.

Tax-deferred growth - Within a PPLI policy, investments grow on a tax-deferred basis. This means that investors do not pay taxes on the income or capital gains generated by the investments as long as they remain within the policy. Over time, this can lead to substantial tax savings and enhanced compounding growth.
Income tax-free death benefit - The death benefit provided by a PPLI policy is generally paid out to beneficiaries free of income tax. This form of wealth transfer can provide funds that heirs can use to pay estate taxes, maintain a family business or use for philanthropic goals.
Access to a broader range of investments - PPLI policies offer access to a wider array of investment options compared to traditional insurance policies. A policyholder’s investment manager can choose from asset classes ranging from registered and unregistered funds, private equity, limited partnership interests in limited liability companies, third-party promissory notes, stock and many others.
Minimized tax reporting - Because the investments within a PPLI policy grow tax-deferred and are owned by the insurance company in a separate or segregated account, policyholders do not need to report income or capital gains annually on their tax returns. This simplifies tax reporting and reduces the administrative burden for investors.

Wealth planning benefits of PPLI

Beyond the tax advantages, PPLI provides several additional benefits that can enhance overall wealth planning strategies. Frank Seneco is president of Seneco Global Advisors, a life insurance provider in the ultra-high net worth space and works with both U.S. families and foreign families with U.S. ties in incorporating PPLI into estate planning. “For families that have wealth earmarked for future generations, PPLI can be used to protect these funds from tax erosion during an insured’s lifetime and then to pass the investments to children and grandchildren as part of an income tax-free death benefit,” he said.

A strategy gaining popularity is intergenerational planning using PPLI.

“There are a number of affluent families where the adult children of the patriarch and matriarch are well-off and where the benefits of PPLI can be positioned to benefit the third and future generations,” said Jordon R. Katz, President of JR Katz, a provider of life insurance solutions in Chicago. “In these situations, it is common for PPLI policies to be purchased on the lives of the second generation where the policy proceeds could be used to assist their children and grandchildren. It is likely these policies will be in place for 50 years, meaning the power of tax-free compounding within the policies can be dramatic.”

There are risks

Katz warned that there are risks with PPLI.

“Generally, there are no performance guarantees with this type of policy and that means a policy could suffer from poor investment management experience, resulting in not being able to use the policy to fully meet planning goals or even the policy lapsing,” he said. As with any planning strategy, those considering PPLI should consult their entire team of legal, accounting, investment management and life insurance professionals.

Is PPLI for you?

Although life insurance company guidelines permit PPLI policy premiums of less than $1 million, it is recommended that policyholders commit no less than $10 million to be paid into a policy as quickly as possible in order to optimize policy performance and benefits.

“The math needs to work,” said Seneco. “There are costs involved in buying PPLI that must be outweighed by the performance of the policy over what will probably be decades. In early policy years, there are significant charges associated with the amount of death benefit that must be purchased and then there are on-going investment management expenses, though, these fees are similar to what a policyholder would experience in a taxable account.”

With the right guidance, PPLI can become a cornerstone of a tax-efficient legacy plan.

Jay C. Judas, JD, M.Sc. is the CEO of Life Insurance Strategies Group, an independent life insurance advisory firm. Jay may be contacted at [email protected].