One of the benefits of working with advanced planning networks is that they can add the right kind of specialist to deliver a better solution for the client than an advisor might be able to achieve working on her own. Private Placement Life Insurance is a powerful solution that’s also powerfully intricate. In the late ’90s PPLI was first offered by several small companies, and then, mainstream players such as New York Life, AIG, Sun Life, Prudential, and Mass Mutual joined in and the solution’s appeal grew. At the same time, the use of PPLI expanded from seeking investment growth free of federal income tax in a cash value account to designing sophisticated estate planning solutions to mitigate estate taxes on the transfer of wealth using the death benefit. Now, PPLI solutions support wealth transfer, wealth creation, and philanthropic needs, by using the death benefit in tax-advantaged ways.
For several years, Robert W. Chesner, Jr., an attorney with Giordani Schurig Beckett Tackett LLP, Austin, Texas, has used PPLI with a variety of affluent clients. If a client with a net worth of $100 million comes to the firm, he or she will likely already have done some hedge fund or other alternative investing, he notes. Those investments are subject to ordinary income tax–federal, state, and municipal–however. When a 9% return nets more like 5% after taxes, the investment starts resembling a muni. For this kind of client and even those residing in states without a state income tax, investing in the same or similar portfolio within a PPLI offers a major advantage by eliminating the federal income tax.
Leslie C. Giordani and Michael H. Ripp, Jr., also attorneys with Giordani Schurig Beckett Tackett LLP, have demonstrated the advantages of accumulating returns inside a PPLI versus a taxed investment (“Private Placement Life Insurance Planning (Part 1),” ALI-ABA Estate Planning Course Materials Journal, 2006). In their hypothetical example, they show the side-by-side scenarios for a PPLI policy insuring a 45-year-old man with a $2.5 million annual premium for five years and a 10% rate of return net of investment management fees (taxed as ordinary income.) A hypothetical combined federal and state rate of 40% was used (see table, below).
Even after the first year, the PPLI cash value exceeds that of the taxed investment–plus the client’s death benefit.
In addition to the features of a traditional policy, a PPLI policy provides:
- Fee transparency to the client, unlike the “hidden” commissions of a traditional policy;
- Investment options, such as hedge funds and private equity;
- Very low cost for insurance and other policy fees (insurance, mortality and expense charges, commonly average around 1% or less over the life of the contract);
- More efficient cash value compounding with the low cost of insurance, the potential performance of alternative investments, and no commissions reducing contributions to the cash value account–especially in the first year.
The interest in PPLI for asset protection has also increased. Asset protection in offshore insurance vehicles offers many additional advantages for high-net-worth clients. By using an offshore trust, you don’t automatically eliminate federal income, since the client still needs to report worldwide income. However, if the offshore trust owns the PPLI, then those assets grow free of any federal income tax–and free of predators after the client’s estate. At the death of the insured, those assets can distribute in a tax advantaged way to the next generation.
PPLI policy premiums start from a low of $1 million ($250,000/year over four years, for example) to a more typical $5-10 million (paid in the early years of the policy or as a single premium). Larger PPLI policies have premiums of $25 million and even $100+million for multi-life contracts. To make the investment side of all PPLI policies efficient, early aggressive funding works best. The premiums usually represent less than one half of a client’s net worth and are typically in the 10-40% range.