The U.S. Capitol. Credit: Shutterstock
Sen. Ron Wyden, D-Ore. — the highest-ranking Democrat on the Senate Finance Committee — has introduced a new bill that could cause big problems for wealthy clients with private placement life insurance policies or private placement annuity contracts, as well as for wealthy clients who would like to use such arrangements in the future.
S. 4279, the Protecting Proper Life Insurance from Abuse Act bill, would classify the private placement arrangements as "private placement contracts," keep them from being defined as life insurance policies or annuities under U.S. federal law, and exclude the holders from using any of the special tax rules that normally apply to life insurance policies and annuities.
If passed and implemented as written, the changes would take effect immediately after the bill became law.
Holders of existing private placement arrangements would have 180 days to replace the arrangements with traditional life insurance policies or annuities and to keep the products from being treated as PPCs.
What it means: Any advisors with clients with private placement life or annuity arrangements need to read up on this bill.
The backdrop: Wealthy individuals and families have used private placement arrangements to create what amount to their own captive, custom-tailored financial arrangements.
Users and advocates say they help people with large, unusual insurance and longevity protection needs get products that meet those needs.
Critics have argued that many of the private arrangement users are trying to evade U.S. income taxes.
Wyden has been investigating private placement arrangements since at least 2022.
He began circulating a draft of the current bill in December 2024.
The new PPC bill: Under the terms of the new bill, which appears to be similar to the December 2024 draft, "PPCs are not treated as life insurance or annuity contracts for purposes" of the Internal Revenue Code, according to a summary posted by Wyden. "There will be no tax-free inside build up and no tax-free life insurance death benefits."
Any earnings or losses on investment assets inside the arrangements "will be taxed currently to the contract holder, and basis in the contract is adjusted accordingly," and "upon the death of the insured, the beneficiary under the contract will be liable for taxes due on the amount of the death benefit that exceeds the basis (amounts paid into the contract plus amounts taken into income over the lifespan of the contract)."
A domestic arrangement could avoid being defined as a PPC if the segregated asset account supporting the contract also supported at least 25 other contracts owned by separate individual investors.
Another section in the new bill could affect life insurance policies or annuites that a "U.S. person" buys from an insurance company outside the United States. If the policy or contract tied product performance to the performance of one or more investment asset held in a separate account, the bill would define the policy or contract as a PPC.
That section might limit the ability of U.S. citizens who live outside the United States to use separate-account-based products purchased in the jurisdictions where they reside.
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