Private placement life insurance (PPLI) is reserved solely for an accredited investor and/or qualified purchaser1 - an individual or entity who is allowed to deal, trade and invest in financial securities and satisfy one or more requirements regarding income, net worth, asset size or professional experience.
PPLI enables policyholders to take advantage of investment products not available in retail insurance, like private equity funds or hedge funds, and defer or escape all income taxation that would otherwise have been paid on the realized gains on those assets. In effect, policyholders have the ability to invest in a completely tax-free environment.
PPLI policyholders are interested in the range of benefits offered, including tax-deferred growth, asset protection, and enhanced privacy. These benefits are often helpful in meeting a policyholder’s unique planning needs and goals, such as providing for family members, funding charitable gifts, or supporting a business succession plan.
Increasingly, PPLI is being used by affluent families to transfer wealth more efficiently by combining an investment strategy with estate planning. By incorporating PPLI into a multi-generational trust structure, a family can enhance the tax efficiency of the investments underlying the policy. Upon the passing of the insured, the policy’s income tax-free death benefit essentially provides a step-up-in-basis at death for the underlying investments.
Businesses and family offices use private placement to informally fund executive benefit programs, support business succession planning and key person retention programs and to invest institutional capital efficiently.2 When incorporated into business planning, a PPLI policy’s death benefit can be utilized to recover the costs, including the time value of money, of employee benefit programs.
Those considering PPLI typically have one or more of these characteristics:
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[1] Private placement products offered by U.S. carriers to U.S. persons are subject to SEC regulations. Each purchaser generally must be a ”qualified purchaser” under §2(a)(51) of the Investment Company Act of 1940, 15 USC §80a-2(a)(51), and/or an “accredited investor” under §501(a) of Regulation D of the 1933 Act, 17 CFR §230.501(a). A “qualified purchaser” is an individual or a family-owned business that owns $5 million or more in investments. An “accredited investor” is anyone who meets one of the below criteria: Individuals who have an income greater than $200,000 in each of the past two years or whose joint income with a spouse is greater than $300,000 for those years, and a reasonable expectation of the same income level in the current year.
[2] IRC §101(a)
