Private Placement Life Insurance May Shelter Income from Higher Taxes
Private placement life insurance (PPLI) combines the financial advantages of high income potential investments with the tax advantages of life insurance. But PPLI is not for everyone.
A good candidate for PPLI is someone with a net worth of $20 million or more in liquid assets, or someone who controls a business that puts them in the same net worth category.
PPLIs are an unregistered security product. As such, they may only be presented to accredited investors. An accredited investor is defined by the Securities and Exchange Commission as someone with a net worth of at least $1 million, excluding primary residence, or income of at least $200,000 in each of the preceding two years. Married couples must have income of at least $300,000 in each of the preceding two years.
PPLI policies are generally structured as variable universal life insurance. This means that the premiums are flexible and policyholders can pay as much or as little premiums as they like. The cost of insurance is deducted from the cash value in the policy subaccounts each billing period. To keep the policy in force the owner must pay enough premium or maintain enough cash value to cover the cost of insurance.
The owner of the policy gets the advantage of tax-free death benefits to the beneficiary or beneficiaries of the policy. The owner also received tax-deferred growth of cash value and tax-free growth of dividends. The owner has access to the cash values which can be used for any purpose and accessed at any age.
The IRS imposes rules on how much premium the owner can contribute to the policy in a given year in order to help ensure the life insurance is used for its intended purpose, as opposed to a tax shelter.
PPLI is different from conventional variable universal life insurance. In a conventional policy, the buyer chooses from a limited menu of investments offered by the life insurance company. When you buy PPLI, you can customize your investment choices-from index funds to hedge funds. There are diversification requirements, which include: no single investment may constitute more than 55% of the account; no two investments may constitute more than 70% of the account; no three investments may constitute 80% and no four may constitute 90% of the account. So the policy must have a minimum of five distinct investments to qualify as life insurance. The investment strategy also may be reallocated tax free.
The PPLI effectively converts a very tax-inefficient investment with a high return, into a very tax-efficient one for the high net income investor, while providing a tax free payout upon death to the beneficiaries. The income earned by the investments inside the life insurance policy, enjoy tax-free growth for as long as the investments remain in the policy. And, if the PPLI is held in an irrevocable life insurance trust, the policy will avoid estate taxes for the insured.
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