Private placement life insurance offers more than just a traditional lump sum payout in case the covered person passes during the plan term. It also provides access to many registered and non-registered investments that individuals can only access through a life insurance policy.
PPLI is a preferred life insurance option during times of market volatility and uncertainty. But before investing, you should know the limitations, thresholds and liquidity about this unique form of life insurance.
What is Private Placement Life Insurance (PPLI)?
PPLI life insurance is a form of variable universal life, meaning it is not term life insurance that expires at a certain point. The life insurance option is considered permanent as it provides a death benefit and cash value to the policyholder.
Life insurance policies with a cash value accumulate value with each payment you make into them, meaning the policy will grow with time as you pay your premiums. The cash value of the policy accumulates once you’ve paid in fully to the death benefit coverage.
Policyholders can invest the cash value of the policy in various investment vehicles. The most unique aspect of PPLI is that it offers a wider range of investment options compared to other universal life products.
Some examples of investments you’ll have access to include hedge funds, alternative assets and commodities.
Another unique aspect this type of life insurance boasts includes the ability to get a much higher death benefit for individuals with high net worth. Other universal life products have a lower cap on the death benefit compared to PPLI policies, making this an ideal policy to cover a unique set of individuals.
How Private Placement Life Insurance Works
This type of life insurance is only for a small segment of the population because it has strict qualifications and a large initial funding amount. Explore some of the key aspects of these policies to learn more and prepare for discussions with a life insurance agent.
Requirements
- Net worth: High net worth, generally in the tens of millions of dollars
- Asset liquidity: Liquid assets of at least $10 million in most situations
- Funding: Policyholder must be able to fund $1 million or more annually during the plan’s first few years
- Asset sheltering: Desire to protect assets from creditors
- Tax strategy: The policyholder should have a good tax adviser who understands the nuances these unique investment options bring when it comes to state and federal taxes
- Investment types: An interest in getting access to hedge funds and other unique life insurance investment options
Funding and ongoing payments
- Flexible premiums: Policyholders have the option to pay as much or as little in premiums as they like, once the initial investment goals are met.
- Insurance maintenance costs: Once you’ve met the threshold for the death benefit and have accumulated some cash value, the cash value investments can pay the ongoing cost of the insurance.
- Maintaining the policy: For the policy to remain in force, the policyholder must pay enough premium or maintain a high enough cash value to cover the insurance cost,
- Policy lapse: Should the policyholder cease payments and the policy’s cash value reach $0, the policy will lapse.
Tax benefits
- Tax-free death benefits to beneficiaries
- Tax-deferred cash value growth
- Tax-free dividend growth in applicable states and situations
What Are the Pros and Cons of PPLI?
As you consider the best life insurance policy based on your needs, review these pros and cons of PPLI.
PPLI Advantages
- Lower commissions compared to other retail life insurance options
- No surrender charges
- Phantom income is not taxed as it would be in traditional investment options
- Complying with tax law for interest and other financial benefits from the policy is easier than they are for investments in hedge funds outright
- Protects cash value of investments from creditors
PPLI Disadvantages
- Complex financials and policy structure
- More advanced investment strategy, making it only for a small population
- Imposes liquidity constraints on the policyholder’s investments
- Most plans have high fees and premiums
Exploring PPLI Investment Strategies
Purchasing a PPLI policy can help individuals invest in a variety of financial vehicles with different tax options compared to investing directly. So while you might already have real estate and hedge fund investments, you’ll have additional financial benefits when investing in these options through a PPLI to diversify investments and provide your loved ones with a death benefit when you die.
Hedge Funds
These limited private investor partnerships help individuals leverage trading non-traditional assets. People invest in hedge funds with the hope of earning higher-than-average returns. However, it’s riskier to invest in hedge funds than it is to invest in stocks or other similar options.
Alternative Investments
This term covers a wide range of investments, including private equity, collectibles and cryptocurrency. They provide a chance to diversify an investment portfolio, though they are generally considered to be less liquid than other investment strategies. Often, they provide greater returns than traditional investments because of higher risk and less liquidity.
Real Estate
Investing in real estate can take many forms, from real estate investment trusts (REITs) to rental properties. Getting started investing in real estate can be somewhat daunting. That’s where having a PPLI financial adviser can help.
Private Equity Funds
A somewhat exclusive investment option, private equity funds are open only to investors and individuals who qualify for investing in them, such as institutional investors and insurance companies, pension funds or high-net-worth individuals. That’s where a PPLI can help get more people access to this investment option.
Dedicated Funds
This can provide tax-deferred returns on investments. These closed-end investments offer diversified business targets to help investors reach their goals. Generally, these are only available through insurance companies or in unique investment situations.
Unique Life Insurance Option for High-Net-Worth Individuals
PPLI is a unique life insurance option designed to provide unique benefits to high-net-worth individuals. A policy can provide tax-deferred benefits as well as a death benefit and financial protection from creditors. Explore this investment option with a financial advisor and review requirements to see whether you qualify.
Frequently Asked Questions
Who should consider purchasing a Private Placement Life Insurance (PPLI)?
Wealthy individuals aiming to pass their assets to their hairs in a tax-efficient way should look into a PPLI policy.
How much should I invest in a PPLI?
You’ll need to invest no less than $2 million, but the best amount to invest will vary based on your finances and goals.
Who offers Private Placement Life Insurance?
Many insurance and financial companies offer private placement life insurance, including Wells Fargo, Morgan Stanley, Pacific Life, Zurich, John Hancock and Investors Preferred. Review your options with your financial adviser to find the best provider for you.
About Rebekah Brately
Rebekah Brately is an investment writer passionate about helping people learn more about how to grow their wealth. She has more than 12 years of writing experience, focused on technology, travel, family and finance. Her work has been published in Benzinga, Hearst Bay Area, FreightWaves and Dallas Observer publications.