The threat of tax increases and a reduction to the federal estate tax exemption is something high-net-worth families must consider when planning for wealth preservation. One strategy investors and family offices are increasingly relying on to prepare for an eventual shift in tax policy is private placement life insurance (PPLI).
The traditional goal of life insurance is to pay the lowest possible premium for the maximum amount of death benefit or maximum return on the death benefit. Whereas a term policy provides needed coverage for a specific period, permanent coverage remains in effect throughout the policy owner’s lifetime.
A permanent insurance policy can come in various forms, including whole life, universal life, variable life and index universal life. The key differences come down to how the mortality costs are calculated and the earnings potential of the cash value. If you seek maximum return on cash value, you may select a policy with the lowest possible death benefit and, therefore, the lowest mortality costs and highest premium applied to the cash value. For greater investment potential, you may instead consider a variable or index policy, for which you can invest the cash value in equity-oriented strategies that have the potential for stock-market-like returns over time. As a result of this investment flexibility, low cost and significant tax benefit, many high-net-worth families have turned to Private Placement Life Insurance (PPLI).
With PPLI, policy owners receive the favorable tax benefits of a life insurance contract wrapped around a broader range of investment options than they typically would find in a traditional cash-value life insurance policy. This may include investments reserved for institutional investors and those with high turnover or inefficiency, such as private equity, venture capital, hedge funds, real estate, and other alternatives. Because these assets are held within the insurance wrapper, appreciation from market gains, interest and dividends escape income and capital gains taxes and can be accessed by policyholders free of income tax.
As an added benefit, distributions from PPLI policies are taxed on a first in, first out (FIFO) basis. This means policyholders can withdraw amounts they put into a policy free of tax and borrow against any appreciated value without incurring tax liabilities as long as the policy remains in force. In other words, the PPLI wrapper helps make tax-inefficient investments tax-efficient. It also allows policyholders to minimize the risks of rising ordinary income and capital gain tax rates that can be as high as 50 percent, depending on where the policyholder lives.
Unlike a standard life insurance policy funded primarily to provide a tax-effective death benefit to heirs, PPLI is a tax-efficient investment and income-planning strategy for which life insurance policy costs are minimal. Over time, as the policy’s cash value increases, internal mortality costs and other expenses can be paid by the policy itself rather than out of the insured’s pocket. Policy owners can access those accumulated funds tax-free during their lifetimes, up to certain limits. Or they may use the policy as collateral to obtain a loan for short-term liquidity needs without having to sell other highly appreciated assets and potentially wreak havoc on their existing estate-planning strategies.
In return for all the flexibility and tax efficiency of holding investments in PPLI, policyholders must abide by strict IRS standards, including medical insurability and investment diversification. While policy owners may allocate their investments from a long menu of options, such as mutual funds, ETFs, and index funds, they are generally prohibited from directing the day-to-day decisions of fund managers. With this in mind, it is important individuals work with professional financial advisors experienced with these unique investments and insurance products.
About the Author: Eric Zeitlin is managing director of Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. He can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or info@provwealth.com.
 Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
 Eric Zeitlin is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
Private Placement Life Insurance policies are unregistered securities products and are not subject to the same regulatory requirements as registered securities products. As such, Private Placement products should only be presented to accredited investors or qualified purchasers as described by the Securities Act of 1933. The information presented here is not an offer to purchase or the solicitation of an offer to purchase an investment product.
 Variable life insurance is a long-term investment and may not be suitable for all investors. Investments in variable products are subject to fluctuating values of the underlying investment options and entail risk, including the possible loss of principal. Product guarantees, including the death benefit, are subject to the claims-paying ability of the issuing insurance company.
 Alternative investments are available only to those who meet specific suitability requirements, including minimum net worth tests. Please review any offering materials carefully and consult with your tax advisor or accountant prior to investing. There are special risks involved with alternative investments, including investment strategies, and different regulatory and reporting requirements. There is no assurance that any investment will meet its investment objectives or that substantial losses will be avoided. Alternative Investments involve substantial risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. These risks include but are not limited to, limited or no liquidity, tax considerations, incentive fee structures, speculative investment strategies, and different regulatory and reporting requirements.
Changes in tax laws or regulations may occur at any time and could substantially impact your situation. You should discuss any tax or legal matters with the appropriate professional
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Posted on May 2, 2024