Private placement life insurance and annuity programs, commonly referred to as PPLI, have quickly become a favorite strategy among ultra-wealthy investors seeking greater tax efficiency within investment vehicles. It allows policy holders to combine the strength of premium investment products, like hedge funds or other alternatives, with the tax-free benefits of life insurance.
“This is a sexy product that people get excited about owning and tell their friends about,” Aaron Hodari, managing director at Schechter, recently told Bloomberg. “It’s an alternative investment that allows you to invest in hedge funds and defer or eliminate taxes.”
It’s estimated that clients put $3 billion into private placement products last year alone, with Lombard International, a Luxembourg and Philadelphia-based wealth manager bought by Blackstone LP in 2014, attracting most of that business; but they aren’t the only players. Wealth managers like Lombard rely on firms with complex insurance expertise—such as Schechter—to handle the structure of the life insurance strategy.
Hodari estimates investors have put upwards of $18 billion into similar funds along with other insurance products for the wealthy like private placement annuity contracts.
What Specific Benefits Does Private Placement Life Insurance Offer?
So, what specifically is drawing people to private placement life insurance and annuity programs? They offer an array of benefits to investors, including:
1. Own Tax-Inefficient Assets In A Tax-Efficient Structure
Private placement life insurance and annuity programs provide ownership of tax-inefficient hedge funds and other alternative investments in a tax-efficient structure. The owner trades incurring short and long-term capital gain taxation for annual insurance and annuity charges—amounting to significant tax savings.
2. Death Benefit Proceeds Can Pass To Beneficiaries Tax Free
Section 7702 of the United States Internal Revenue Code defines how life insurance contracts are taxed. Death benefit proceeds are received income tax-free to the policy beneficiaries. The cash value in life insurance contracts grows on a tax-deferred basis—and if structured properly, both the investment cost basis and gains can be accessed income tax-free.