Private Placement Life Insurance (PPLI) is a type of permanent variable universal life (VUL) insurance policy that provides both life insurance protection and a tax-advantaged investment account within the policy. Premiums paid in excess of the cost for the life insurance coverage can grow tax-free in the investment account for the policy owner. Similar to VUL, the cash value in the investment account of a PPLI policy may be invested in various domestic and international stock and bond mutual funds, ETFs, and structured index strategies.

A key factor distinguishing PPLI policies from regular VUL policies is that PPLI policies include additional investment options, such as, hedge funds, private real estate funds, venture capital, private equity, commodities, etc.

Another key factor distinguishing PPLI from regular VUL is that PPLI is open only to a special class of people, called accredited investors, while VUL is available to the general public.

Under US securities law, you can qualify for the accredited investor status if you meet one of following financial criteria:

1. Your individual income was over $200,000 (or your joint income was over $300,000) in each of the past two years, and you have the reasonable expectation of the same income in the current year.
2. Your net worth (or your joint net worth with your spouse) is over $1 million, including all liquid assets except your primary residence.

You must be an accredited investor in order to buy a PPLI policy. If you are a qualified purchaser (with net investable assets of $5 million or more, excluding primary residence or business property), you may also purchase PPLI policies.

PPLI insurance typically will not make sense for families focused solely on traditional life insurance protection. It tends to appeal to high income or high net worth individuals who are insurable and have the desire for tax-advantaged investment. A typical PPLI policy owner contributes the maximum premiums allowed by the IRS tax code 7702 and invests the excess cash (net of insurance cost) inside the policy for tax-savings.

PPLI is highly regulated and must comply with state and federal laws. Typically, people look for the following features from a PPLI contract:

1. Tax Treatment. Currently, the tax rules generally applicable to 7702 life insurance contracts also apply to PPLI contracts. The investments inside the policy grow tax-deferred. Withdrawals and loans from the cash value by the policy owner can be treated tax-free and with net 0% interest in most cases. Loans are not required to be paid back. The death benefit is tax-free to the beneficiaries.
2. Investment Options. The policy owner typically contributes much more premium than the insurance cost and invests the excess premium inside the policy. Investment options include conventional stock and bond mutual funds and ETFs, and hedge funds and private equity funds which are not available in regular VUL policies. The cash value is typically held in a “separate account”, which is not subject to the insurance company's creditors.
3. Flexibility. PPLI insurance offers flexibility on the timing and amount of premium payments and the amount of death benefit protection.
4. Cost Structure. PPLI and VUL offer a cost structure that promotes cash value growth. The cost is high in the first 10 years and decreases dramatically afterwards. When the insured reaches the age of 90s, the insurance cost may reduce to zero or near zero. Over the long term, the total insurance cost may be structured to be much lower than the tax cost when investing the same premiums in a taxable account. Thus, the policy owner could get much more net (after-tax and after-cost) investment return this way. This is why many people put hundreds of thousands, or millions, of dollars into such policies. The U.S. Senate Finance Committee recently did an investigation and concluded that PPLI is a tax shelter for the rich. It is likely that future legislation would put certain restrictions on the use of PPLI and VUL.
5. Estate Planning. As with conventional life insurance, the death benefit is tax-free to the beneficiaries. In addition, holding a PPLI policy through a properly structured irrevocable life insurance trust (ILIT) may protect the policy proceeds from estate and generation-skipping transfer (GST) taxes.
6. Simplified Tax Reporting. Dividend, income, and capital gains inside the investment account of the insurance policy do not need to be reported on tax returns. Furthermore, K-1 forms are not required for alternative investments made through a PPLI policy.
7. Asset Protection. In many states, the cash value and death benefits of such a life insurance policy are protected from creditors and bankruptcy proceedings.

The following articles may help you understand the roles of cash value life insurance policies in family protection, retirement income planning, tax planning, and estate planning.

1. Wyden Exposes Private Placement Life Insurance as a Tax Shelter for the Ultra-Wealthy Holding at Least $40 Billion
   The U.S. Senate Finance Committee recently did an investigation and concluded that: 1) PPLI is used as a “buy, borrow, die” tax shelter for the ultra-wealthy. 2) At least $40 billion is held in such policies. 3) Legislation is needed to curb the use of PPLI as a tax shelter.
2. What Is Section 7702?
3. Don’t Let Taxes Dim Your Retirement: How to Plan Ahead with Your ‘Tax Bucket List’
   This article talks about different ways to get tax-free income. Two heavy-hitters are Roth and cash value life insurance. Roth is great but has strict limitations on the amount you may contribute each year. On the other hand, cash value life insurance does not have such limitations. You may put hundreds of thousands or millions of dollars into such policies. Note that not all cash value life insurance policies are created equal. Some policies may dramatically boost the net (after-tax and after-cost) investment return than others.

PPLI (private placement life insurance) and VUL (variable universal life) offer family protection, tax-advantaged investment, and enhanced asset diversification, with the most growth potential over the long term, on an after-tax and after-cost basis. However, it requires you to be insurable (being relatively healthy and age appropriate). Not everyone is qualified. If you are interested in knowing more about how such products may benefit you, we will be happy to provide free data analysis based on your situation to help you decide.