Senate Finance Chair Broadens Inquiry Into Private Placement Life Insurance

A lawmaker who helps shape federal tax legislation has indicated that he wants to keep wealthy families from using private placement life insurance to replace any federal tax loopholes that Congress closes.

Sen. Ron Wyden, D-Ore., the chair of the Senate Finance Committee, today announced that he has written to Prudential Financial, Zurich Insurance Group and the American Council of Life Insurers to get more information about the PPLI market, and the possibility that many PPLI policies may serve only to reduce the income taxes of families that rank in the wealthiest 1% of American families, not to provide genuine insurance.

“Is investment in PPLI products marketed to new or existing clients as a means to minimize or eliminate ordinary income, capital gains or estate taxes?” Wyden asks in the letters to Prudential and Zurich. “If so, please explain the legal basis for why these products help minimize or eliminate taxes.”

Wyden also asks the ACLI a similar question, and he asks all three organizations questions related to the possibility that some clients might be using PPLI policies to hide offshore assets from the IRS or other federal agencies, or to launder money obtained through illegal means.

What It Means

Lawmakers face intense pressure to find tax revenue they can use to narrow federal budget deficits and pay for popular new tax programs and programs.

That makes any products or arrangements that reduce the taxes of the wealthy tempting targets for congressional letters, press releases, hearings and, possibly, legislation.

Private Placement Life Insurance

U.S. life insurers typically set maximum size limits for life insurance policies, and some wealthy families have life insurance arrangements that are bigger than some smaller insurers’ life insurance businesses.

Families have used PPLI policies to create their own big, customized life insurance policies for decades.

Consultants and advisors have argued that PPLI arrangements are a legal way for wealthy families to reduce their taxes while getting valuable insurance coverage.

The U.S. Government Accountability Office noted in August 2020 that it had little information about the size or structure of the PPLI market.

U.S. prosecutors received $77 million in May from Swiss Life Holding, a Swiss life insurer, in connection with allegations that the company and its customers had used 1,608 PPLI wrapper policies to hide $1.45 billion in assets from the IRS.

Revenue Raisers

Wyden notes that one proposal for increasing federal income tax revenue involves changing the “stepped-up basis,” or taxable investment value calculation rules, now used in families’ estate planning arrangements.

Some experts say “PPLI would increase in importance if Congress were to eliminate the ‘stepped up basis’ loophole used by the wealthiest households to transfer assets to their heirs tax-free,” Wyden writes. “A PPLI policy can effectively replicate a basis step-up on unrealized gains through a tax-free insurance death benefit paid to beneficiaries.”

Consultants who help clients set up those arrangements see them as being helpful to clients.

Wyden sees them as a concern.

Data

While consultants, advisors and life insurers with an interest in the PPLI market might like to see PPLI market data, Wyden would also like to see more data.

He emphasizes in the three letters that the size of the market is hard to determine, but that one estimate is that Prudential might have about $28 billion in PPLI assets under administration in insurance dedicated funds and separately managed accounts.

He has asked the recipients of the new PPLI letters about their PPLI asset totals and annual PPLI deposits for the period from 2015 through 2021.

Reactions

Representatives for Prudential and Zurich were not immediately available to comment on the new Wyden letter.

Whit Cornman, an ACLI spokesperson, said the ACLI is reviewing the letter now.

“The fundamental purpose of life insurance is to protect families financially in the worst of times,” he said. “Today, consumers have a choice of policies to meet their needs with cash-value life insurance being a key component to American families’ long-term financial security, along with home ownership and retirement savings.”

Cornman noted that, because of the COVID-19 pandemic, life insurance benefits payments soared to $90 billion in 2020, and then to $100 billion in 2021.

“Throughout the pandemic, life insurers continued to support jobs, businesses, and families nationwide through long-term investments, with $572 million daily on average invested in the U.S. economy,” Cornman said.

Sen. Ron Wyden, D-Ore. (Photo: Bloomberg)