Relaxed Requirements
A Covid-relief law signed by President Trump in December makes PPLI even more attractive. The package contained a provision that changes the interest rate assumptions on life insurance policies. The politically powerful life insurance industry had argued the current rules were unworkable in a low-interest rate environment, so Congress relaxed the requirement for policies to qualify for favorable tax treatment.
Though lobbyists’ primary goal was tweaking the rules affecting ordinary life insurance products, the upshot is that the wealthy can now put more money into a PPLI policy while paying less to an insurance carrier for life coverage. “You want to maximize every dollar you can put into the policy,” said David Kleinhandler, principal at life insurance advisory firm AskVest. “There’s a lot of opportunity for people to take advantage of these new regulations.”
Even as PPLI’s popularity has spread, it’s primarily pitched to clients as a place to put investments, like hedge funds or credit products, that generate lots of income taxable at the top rate. These can surpass 50% when you include the top federal ordinary rate of 37% and state and local income taxes in California and New York City. If all investments are subject to the ordinary rates -- as Biden has proposed for those earning more than $1 million per year -- then a broader array of investments make sense in PPLI policies.
Democrats in Congress, who are beginning the process of turning Biden’s tax plan into legislation, disagree on how much to hike rates on capital gains.
Because of the potential pitfalls and complexity of PPLI, clients who are initially interested sometimes end up thinking twice before committing their money, advisers say.
“This can get very complicated, and there is a percentage of our clients who value simplicity above all things,” said Jon Ripchick, wealth strategist at Goldman Sachs Ayco Personal Financial Management, which offers financial planning to corporate executives.
Carriers providing PPLI policies have tried to attract customers by making their platforms easier to use. “Fees are coming down,” Ripchick said. “Investment options are becoming more competitive.”
Market Leader
Lombard International, owned by Blackstone Inc., dominates the market, but several other firms are now offering the product. To improve their pitch to the wealthy and their most-trusted advisers, some providers are now allowing those advisers to keep control of the PPLI investments. To comply with the rules, PPLI assets need to go in a separate account that clients technically don’t have any input on. But clients often choose their own adviser to manage that fund, and set goals for how they want it invested.
Hemel, of the University of Chicago, said one option to stop the wealthy from using PPLI to escape taxes is to cap the size of life-insurance death benefits. Another is to write stricter IRS regulations, perhaps further limiting the control that policyholders are allowed to have over investment choices.
Otherwise, Hemel has warned other tax policy experts, PPLI is a “relatively easy workaround that will allow high-net-worth individuals to generate virtually unlimited amounts of investment income while avoiding capital gains taxes during life and at death.”
This article was provided by Bloomberg News.