Another Attack on Private Placement Life Insurance

The use of private placement life insurance (PPLI) by high-net-worth individuals has generated considerable controversy over the years, with proponents arguing that it is a proper use of existing laws that provide many of the favorable income and estate tax benefits of annuity and life insurance contracts. While originally an esoteric product issued by offshore insurers, today’s market participants include many mainline domestic insurers and an increasing number of our clients have pursued PPLI policies.

PPLI policy holders must be accredited investors and meet other significant net worth (usually $20 million) and liquidity (usually $10 million) requirements. PPLI policies generally require premium payments of several million dollars, with minimums often in the $3 to $5 million range. PPLI policies are complex, require careful design and considerable planning, and are usually integrated into the insured’s estate plan, which requires collaboration between the insured’s insurance advisors and estate planning attorney.

PPLI policy premiums are used in part to fund life insurance benefits with the remainder credited to the policy’s cash value, which can be invested (at the policy holder’s direction) in traditional stocks and bonds and a broad range of alternative investments, including hedge, private equity, and real estate funds. The frequency of premium payments can often be made rather flexible.

Income and gains on invested cash value are tax deferred. The policy holder may borrow against the cash value of the policy (without paying tax on the deferred income or gain), providing important liquidity for the policy holder. Partial withdrawals of cash value may also be free of current tax. Properly structured, life insurance proceeds payable on the insured’s death can pass to heirs free of both income and estate tax.

Those who view PPLI negatively characterize PPLI as a personal investment portfolio in a life insurance wrapper that affords wealthy individuals unintended tax benefits. While similar in structure to conventional and permissible variable universal life (VUL) policies, the broad range of investment options within PPLI policies (and the ability to transfer cash value from one investment to another without current tax) makes them less distinguishable in form from conventional VUL policies. Combine those and other tax benefits with the ability of the policy holder to access liquidity without triggering current tax, PPLI appears to many to be the sort of “have your cake and eat it too” investment vehicle that should not be. There is always room for fair debate about that.

Senate Finance Committee Chairman Ron Wyden (D-Oregon) has introduced the Protecting Proper Life Insurance from Abuse Act to combat the use of PPLI. This is hardly the first legislative attack on PPLI. Senator Wyden has tried before. If enacted into law, the Senator’s Bill would eliminate both the tax deferral and life insurance benefits of PPLI policies. The Bill would even apply to existing policies, providing a six-month window within which the insured can terminate the PPLI policy or convert it into a conventional form of policy that falls outside the Bill’s restrictions. Accrued income and gains on PPLI policies that are not successfully converted into compliant policies will be taxed to the policy holder, whether or not received. With the change in control of the Senate, Senator Wyden’s effort to do away with most PPLI policies may or may not advance. That said, the upcoming budgetary process requires revenue raisers to help “pay for” for the new administration’s proposed extenders of tax benefits under the 2017 Tax Cuts and Jobs Act (many of which expire at the end of 2025). That makes the fate of Senator’s Wyden’s bill less predictable.