Senate scrutinizes ultrawealthy life insurance strategy

By Steven A. Morelli

A life insurance vehicle for ultra-high-net-worth individuals and families is coming under Senate scrutiny as lawmakers look to tighten what they call tax loopholes in search of revenue.
Sen. Ron Wyden, D-Ore., chairman of the Finance Committee, sent letters to three life insurance companies and an association asking about private placement life insurance (PPLI), a strategy used by wealthy clients to place large assets into a universal life product to pass to heirs.

“As Chairman of the Senate Finance Committee, I am investigating the use of PPLI policies and other loopholes exploited by the wealthiest 1 percent of Americans to avoid paying their fair share in taxes,” Wyden said in letters to Lombard International, Prudential Financial, Zurich Insurance Group and the American Council of Life Insurers (ACLI).

Lombard International Group supplied a response via email: “Lombard International Group and its member companies fully comply with all applicable legal, regulatory and fiscal requirements in the jurisdictions where they conduct business.”

The letters seek answers to a dozen questions about the scope of the PPLI business and its marketing. Wyden asked the aggregate amount of business the carriers are doing in PPLI, how they calculate the value, how PPLI is marketed and the legal justification of claims, among other concerns. The ACLI was asked what it knows of its members’ PPLI business and opinions about business practices. The letters were sent on Sept. 21 with answers required by Sept. 30.

In an e-mail to InsuranceNewsNet, ACLI Vice President of Public Affairs Jack Dolan said he could not address Wyden’s questions but defended the value of life insurance, saying, “The fundamental purpose of life insurance is to protect families financially in the worst of times. Today, consumers have a choice of policies to meet their needs with cash-value life insurance being a key component to American families’ long-term financial security, along with home ownership and retirement savings.”

Dolan added that the industry showed its value during the pandemic, paying out $90 billion in benefits in 2020 and $100 billion in 2021. The insurance companies did not respond to requests for comment.

PPLI Strategy

PPLI is typically used by families with at least a few million dollars to put into the strategy. According to the consultant Faegre Drinker, PPLI is a way for families to transfer wealth in a “tax-efficient” manner as tax pressure increases in local, state and federal jurisdictions.

“With increasing state and federal individual income tax rates, enacted and anticipated legislative tax changes and increasing administrative complexity accompanying private (hedge fund) investments, life insurance may be an attractive strategy for families to consider, not only for its asset protection and death benefits, but also for its tax-efficiency and simplicity,” according to a Faegre Drinker post.

Families can get the benefit of life insurance tax treatment and borrow from the cash value “free of income tax” and transfer the assets to beneficiaries after the insured’s death income tax-free, “eliminating all deferred gains,” according to the article.

The barrier is high though. According to Faegre Drinker, the minimum criteria are: being an accredited investor or a qualified purchaser under Security Exchange Commission regulations; being adequately insurable; having at least $3 million in cash for annual premium commitments; prioritizing cash value accumulation; and wanting exposure to alternative investments, particularly when the policyowner is a resident of high income-tax state.

To qualify, the assets must be diversified and must be owned and controlled by a third party. The policyowner must not have the power to select investment assets, vote the securities or exercise rights pertaining to the securities, or extract money from the account by a withdrawal.

Tax Evasion?

In his press release, Wyden referred to a case in which Swiss Life pleaded guilty to using PPLI policies and other instruments as “ ’insurance wrappers’ to help to help thousands of U.S. taxpayers’ conceal their ownership of assets offshore and evade paying U.S. taxes.”

Swiss Life agreed to pay $77.3 million to the U.S. Treasury, which includes restitution, forfeiture of all gross fees and a penalty component, to settle the case.

In addition to the tax evasion concern, Wyden also said PPLI could potentially be used to avoid the impact of estate tax reform.

“Some experts have also indicated PPLI would increase in importance if Congress were to eliminate the ‘stepped up basis’ loophole used by the wealthiest households to transfer assets to their heirs tax-free,” according to the Wyden release. “A PPLI policy can effectively replicate a basis step-up on unrealized gains through a tax-free insurance death benefit paid to beneficiaries.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].