Most investors build their portfolios to achieve two goals: growth and protection. Though life insurance falls on the protection side of the ledger, it can also be used as an effective growth tool. Investors can choose variable universal life insurance policies, which balance protection with the ability to access its cash value via investments through subaccounts that operate like mutual funds.
If you’re an affluent investor considering life insurance, one option is private placement life insurance (PPLI)—a form of variable universal life insurance that offers access to a broader range of investments while providing unique tax advantages.
Unlike traditional life insurance, PPLI policies allow for greater customization. Not only can your financial advisor directly manage your portfolio, but they can also select from a broader range of investments, including alternatives and separately managed accounts. Additionally, PPLI policies can offer higher death benefits than traditional life insurance policies available through the public markets, providing more protection to wealthy families.
Here are three benefits to choosing PPLI as an investment vehicle:
1. Tax advantageous. Since PPLI is structured using a life insurance policy, it provides investors with significant tax advantages. All assets inside a PPLI policy grow tax-deferred, which is especially helpful for high-income-generating investments such as private credit and hedge funds. Beyond the tax-free death benefit, the insured can generate tax-free income during their lifetime by structuring withdrawals as policy loans, allowing them to access funds without triggering a taxable event.
2. An effective estate planning tool. Like all life insurance, the death benefit for a PPLI policy is passed on to beneficiaries tax-free. When used in conjunction with an irrevocable life insurance trust (ILIT), the value of the assets in a PPLI policy can be removed from the insured’s estate altogether, reducing the overall assets subject to estate taxes.
3. Credit protection. For high-net-worth investors, investing in a PPLI policy provides added safeguards because life insurance proceeds are protected from creditors in case of bankruptcy or litigation.
While PPLI policies can serve as an effective growth and protection vehicle, they are geared to a very specific type of investor. People who purchase PPLI policies typically have a net worth of $20 million or more, as they must be able to allocate approximately $1 million to $5 million in annual premiums for the first several years—and all premiums must be paid in cash, not in “in-kind” investments.
Additionally, PPLI policies are most effective when used as a mid-to-long-range investment vehicle since the main benefit is the compounding effect of tax-free performance. Although these policies offer myriad investment options, the investor must be comfortable relinquishing discretionary decision-making control to their advisor.
With private placement life insurance, investors can grow and protect their wealth in the most flexible, tax-advantaged manner. Though only appropriate for a small slice of the investment population, PPLI is a good option for wealthy families with the means and time horizon to take full advantage of the benefits of these policies to grow and transfer wealth while mitigating tax burdens.
Jim Carroll is senior wealth advisor and portfolio manager at Ballast Rock Private Wealth. Andrew Mescon is CEO at Ballast Rock Private Wealth.