Sales Strategy

Helping clients preserve wealth while minimizing taxes with private placement life insurance

Estimated 4m read
Sales Strategy

Helping clients preserve wealth while minimizing taxes with private placement life insurance

Sales Strategy

Helping clients preserve wealth while minimizing taxes with private placement life insurance

Estimated 4m read
Sales Strategy

Helping clients preserve wealth while minimizing taxes with private placement life insurance

Estimated 4m read
Sales Strategy

Helping clients preserve wealth while minimizing taxes with private placement life insurance

Estimated 4m read
Sales Strategy

Helping clients preserve wealth while minimizing taxes with private placement life insurance

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By Modern Life
December 29, 2023
By Modern Life
Dec 29, 2023
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Private Placement Life Insurance (PPLI) has emerged as a strategic tool for financial and insurance advisors seeking innovative ways to help clients preserve wealth while minimizing taxes. In this article, we’ll delve into the various aspects of PPLI, exploring its tax treatment, investment options, premium flexibility, utilization in irrevocable life insurance trusts (ILITs), associated risks, and ideal client profiles.

Benefits of PPLI

Tax advantages

PPLI policies offer notable tax advantages, making them an attractive wealth preservation tool. Earnings within the policy grow tax-free, providing a shelter for tax-inefficient assets. Transfers between investments within the policy remain untaxed. Income can generally be tax-free from the policy if it is appropriately structured and the policy is not a modified endowment contract (MEC). Additionally, the beneficiary's death benefit is typically not subject to income tax. 

Investment options

PPLI provides a customizable range of investment options, allowing policy owners to tailor their portfolios based on individual objectives. This flexibility extends beyond the offerings of variable universal life (VUL) policies, enabling investments in real estate, hedge funds, private equity funds, and the utilization of insurance dedicated funds (IDFs) or a separately managed account (SMA).  

IDFs are private investment portfolios open to insurance carriers for allocation to PPLI accounts. They must be separate legal entities apart from the insurance carrier and its general account, allowing a degree of creditor protection for the client. 

In general, either the carrier or the investment advisor will select IDFs for utilization on behalf of the policy.  However, some carriers allow the policyholder to influence the allocation of their investment funds among a pre-determined set of IDFs approved by the carrier. 

Premium flexibility

PPLI offers flexibility in premium payments and death benefit protection, similar to a traditional life insurance product. Advisors may recommend front-loading premiums with PPLI policies to maximize cash value while minimizing costs. In most cases, this also helps provide the highest possible return on death benefit protection.  

Establishing an irrevocable life insurance trust (ILIT) for further tax advantages

Utilizing irrevocable life insurance trusts (ILITs) can enhance the tax efficiency of PPLI policies by providing a structured framework that aligns with specific estate planning goals. Here's how:

  • Estate tax efficiency: ILITs are designed to remove life insurance proceeds and other assets from the insured's taxable estate. When a PPLI policy is held within an ILIT, the death benefit is generally not part of the client’s taxable estate. This helps preserve more of the estate for heirs and minimizes the impact of estate taxes.
  • Gift tax considerations: ILITs allow for strategically gifting premium payments to the trust. By leveraging the annual gift tax exclusion and, if applicable, the lifetime gift tax exemption, individuals can fund the PPLI policy within the ILIT without incurring gift taxes. This can be particularly beneficial when dealing with significant premium amounts associated with PPLI.
  • Asset protection: While PPLI policies generally enjoy a certain degree of creditor protection, assets held within an ILIT, including the PPLI policy, may be further shielded from creditors and legal claims. This can provide an additional layer of protection for the wealth preserved in the policy, contributing to the overall financial security of the insured and their beneficiaries.
  • Control and management: ILITs provide a structured mechanism for managing and distributing life insurance proceeds according to the grantor's wishes. The trust can specify how funds will be used, when they will be distributed, and who the beneficiaries are. This level of control can be crucial in aligning the financial strategy with the overall estate plan.
  • Choice of domicile: An ILIT can often be domiciled in states like Delaware, South Dakota, or Nevada to minimize state premium taxes. 

Risks of PPLI

PPLI policies offer unique benefits, but like any financial instrument, they come with certain risks that individuals and advisors should carefully consider. 

MEC status

Risk: As mentioned above, if a PPLI policy becomes a modified endowment contract (MEC), the favorable tax treatment generally associated with life insurance may be lost.

Mitigation: Advisors need to closely monitor premium payments to ensure they do not breach the limits specified by the IRS.

Investment risk

Risk: PPLI does not guarantee returns, exposing policyholders to market fluctuations and the absence of downside protection.

Mitigation: Policyholders should know that while there is unlimited upside potential, they must be prepared for the inherent investment risks. A well-diversified investment strategy within the policy can help manage the risk.

SEC regulation

Risk: PPLI products are not registered under securities laws, necessitating that purchasers meet the accredited investor or qualified purchaser requirements under SEC regulations. These regulations stipulate that individuals must meet specific income or net worth thresholds to be eligible, typically an annual income of at least $200,000 ($300,000 for couples) or a net worth of at least $1,000,000. 

Mitigation: Advisors must confirm that clients meet the specified income and net worth criteria before recommending PPLI policies. Remember that SEC rules are subject to change, so staying up-to-date on the latest regulations is crucial.

Investor control

Risk: Policyholders must follow the investor control doctrine, which states that to preserve tax advantages, policyholders must not exert excessive control over policy investments, meaning the policy's primary purpose must be providing a death benefit. Therefore, PPLI investment options must be offered only by purchasing life insurance, limiting the policy owner's direct control over the policy investments.

Mitigation: Clients must understand and accept the restrictions on their control, and advisors should ensure compliance with the investor control doctrine to maintain the policy's tax advantages.

Diversification rules

Risk: Diversification rules for PPLI policies mandate that each separate account within the policy must generally contain at least five investments, with no single investment having control over more than 55% of the portfolio. 

Mitigation: Advisors should carefully construct and monitor the investment portfolio within the policy to comply with diversification rules, ensuring that no single investment dominates the portfolio.

Premium funding

Risk: Funding PPLI policies involves significant premiums, and if held within an irrevocable trust, planning is necessary to ensure those payments don’t exceed the current gift tax exemptions. The current annual gift exclusion for 2024 is $18,000, while the lifetime exemption for 2024 is $13.61 million per individual ($27.22 million for couples). Remember that the lifetime exemption amounts are expected to be cut in half when the estate tax sunset takes effect in 2026.

Mitigation: Advisors should work with clients to develop a premium funding strategy that aligns with their financial goals and gift tax considerations.

Costs of maintenance

Risk: PPLI policies incur various costs, including commissions, mortality, expense charges, and investment management fees.

Mitigation: Clients should be aware of the associated costs, and advisors should transparently communicate the impact of fees on the policy's overall performance.

Ideal client profile

The ideal client for a PPLI policy will vary based on the client’s circumstances. However, this policy generally requires an individual with substantial financial capacity. A potential policyholder should have liquid assets of at least 10 million dollars to cover expenses and demonstrate the ability to fund large premium amounts.

PPLI is also attractive for clients who want a long-term tax diversification strategy, want to invest in alternative assets otherwise not available with traditional insurance products, want to enhance overall tax efficiency on investments, and require estate & wealth planning.

Next steps

Modern Life is a tech-enabled brokerage that streamlines the life insurance process for advisors. Here’s a closer look at how we can help your firm grow its life insurance business:

  • Easy client intake: Modern Life offers digital intake forms, enabling clients to conveniently complete necessary documentation from the comfort of their homes. This leads to more precise responses and accelerates the underwriting process, ensuring clients promptly get the coverage they need.
  • Document management: We provide a secure platform for storing and organizing client documents. This single-point document management system minimizes paperwork-related mishaps, enhances organization, and promotes efficient case management. 
  • Status & requirement tracking: Advisors can effortlessly track the status of pending and completed requirements for each case. This real-time tracking system keeps you up-to-date and enables you to proactively engage with new and existing clients, helping to expedite the underwriting and approval process. 
  • Product choice: Modern Life offers diverse coverage options, including access to PPLI policies, allowing advisors to cater to various client needs. Advisors can also compare quotes from multiple carriers to find the best options that align with client preferences.
  • Responsive brokerage support: Insurance can involve complex scenarios. Modern Life provides dedicated support for complex cases, ensuring advisors receive the assistance they need. This support results in faster approval times and cost savings for your clients. Our brokerage team is equipped to handle challenging scenarios, respond promptly to advisor questions, and provide service that aligns with the evolving insurance landscape. 

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