Private placement life insurance (PPLI) is a special type of life insurance that initially originates from the United States. The PDF attachment explains what basic life insurance is and what types of people might require it.
PPLI differs from traditional life insurance in that it is privately offered and has a cash value that is linked through the policy to one or more investments, rather than a normal retail type product. Due to the features of this type of investment, US insurance carriers will typically register variable life insurance offerings with state and federal securities regulators. Many PPLI products for US persons are offered through non-US carriers, Cayman, Puerto Rico, Barbados, and Bermuda being the most common.
Matthew Ledvina works with many clients to help them establish US tax compliant PPLI policies, drawing on his vast experience of US tax law. There are various benefits and advantages to certain individuals of opting for private placement life insurance rather than traditional life insurance.
PPLI Benefits and Advantages
One of the key benefits of PPLI is that the funding and ownership structures are highly customisable. The expenses and fees associated with this type of insurance are transparent and there are no up-front commissions.
Depending on the company issuing the PPLI, the investments options that are available for underlying policy assets will vary. These can range from a select few approved funds, right through to an open architecture structure that encompasses the full range of investment alternatives that are eligible for insurance.
Variable Universal Life policies, or PPVUL, offer the individual a significant death benefit that exceeds the cash value of the policy, as well as cash value accumulation. Deferred Variable Annuity policies, or PPVA, do not have a death benefit payment included, but do offer the same cash value accumulation and investment flexibility of PPVUL.
Investment Types
The investment selection that is contained within the offering usually needs to be detailed to some level by the carrier when they register the offering. Often carriers register a uniform offering, which might include various hedge funds or mutual funds, as they do not know the investment profile of each potential client at the time of registering.
Certain types of investment are not suitable to be placed within PPLI policies. Hedged strategies and absolute return investments are the most appropriate types of investment, while equity-based investments are usually unsuitable. You can learn more about hedging strategies by watching the short video attachment to this post.
An investment portfolio for PPLI tends to have relatively large drawdowns due to stock market volatility, so policy owners may find that they are required to put more money into it if the account value drops significantly so they can keep it in force.
Offshore PPLI
PPLI originates from the United States, but for many years the offshore PPLI industry has been seeing significant growth. PPLI products are seen in the UK, and most of Europe, and especially in Asia where there is general acceptance of insurance products. The US has strict rules for what is ‘insurance’ and what is not, and this is contrasted with Europe or Asia where a product only has to be issued by an insurance company. The US rules are focused on the characteristics of the policy, not who issues the policy alone.
Typically, companies offering PPLI outside of the US will not price the service as a traditional insurance carrier but rather as a provider. PPLI can often be offered to clients at a reduced cost as the offshore carriers have lower overheads.
Offshore PPLI providers hardly ever engage in marketing and advertising, and many are prohibited from maintaining a domestic sales force. These savings can be passed on to high net worth clients in the form of lower commissions. For the purposes of estate planning, PPLI can act as a powerful tool., as hedge fund investments can be made tax-free inside insurance policies.
The infographic attachment offers some more top tips for reducing your taxable income.