Why PPLI

Private Placement Life Insurance (PPLI) is a fully transparent, flexible insurance structure used for investment, tax, and estate planning for high net worth individuals

An Example: Driving higher net investment returns with PPLI

To illustrate the relative advantage provided by investing within a PPLI structure, let’s first consider the alternate option of investing in a taxable account with the following assumptions:

  • A high net worth investor has allocated $1.0 million to a private debt fund
  • The private debt fund produces an annual yield of 5.0%
  • The investor is subject to a marginal tax rate of 50.0%

In the first year, the private debt fund generates a return of $50,000 which is subject to tax at 50.0%, resulting in a net return of $25,000.  The year-end portfolio value is $1.025 million.

Next, let’s consider making the exact same investment within a PPLI structure with the following assumptions:

  • The premium to be paid into the PPLI policy is $1.0 million
  • The premium is invested in the same private debt fund, producing an annual yield of 5.0%
  • Investment returns are not subject to tax within the PPLI policy
  • Policy charges for maintaining the PPLI structure are 1.0% of the asset value
In the first year, the private debt fund generates a return of $50,000 which is not subject to tax.  Policy charges total $10,000, resulting in a net return of $40,000.  The year-end portfolio value is $1.04 million, or $15,000 higher than if the same investment was made in a taxable account.

Finally, the annual analysis illustrated above must be extended over the life of the PPLI policy to assess long-term performance.  Policy charges may outweigh the taxes which would otherwise be payable in the first several years of the policy.  However, as policy charges decline after several years the tax benefits will likely outweigh these expenses.  

Caledonia assesses each PPLI structure using the process above, using appropriate assumptions for:

  • Investment income tax characteristics (interest / dividend / capital gains)
  • Investment asset location (corporate / personal)
  • PPLI policy charges