Private Placement Life Insurance (PPLI) is a fully transparent, flexible insurance structure used for investment, tax, and estate planning for high net worth individuals
PPLI Structural Basics
While PPLI is a life insurance policy, it is best to think of it as a ‘wrapper’ placed around an investment which eliminates or defers income tax which would otherwise be payable on the investment income. Amounts invested in a PPLI structure are paid as premiums over the period of several years. The premiums are first used to purchase a minimum required level of life insurance (the Insurance Component), with the remaining funds invested on a tax-free basis through a segregated account (the Investment Component) within the PPLI policy .
The Insurance Component
Each year, the insurance carrier charges the cost of a term life insurance policy. The amount of protection required fluctuates each year, tracking the investment performance of the segregated account, in order to maintain the policy’s tax exempt status. PPLI policies typically minimize death benefits to the extent possible in order to minimize policy charges and drive investment growth. PPLI policy charges typically range from 1.0% – 1.5% over the first 10 years of the PPLI structure, falling below 1.0% in the subsequent years.
A properly structured PPLI policy will have annual insurance costs which are lower than the taxes that would otherwise be payable, driving higher net returns with no incremental investment risk.
The Investment Component
After deducting any costs associated with the ‘Insurance Component’ of the PPLI structure, the remaining funds (also known as the ‘Cash Value’ of the account) are invested into one or more investment funds. Investment income generated within the PPLI structure are sheltered from tax.
As a result, investments which generate investment income typically subject to the highest marginal tax rates are particularly attractive if held within a PPLI structure.