What is Private Placement Life Insurance?

May, 2023
What is PPI?

Private Placement Life Insurance (PPLI) is a type of life insurance policy that is typically offered only to policyholders who meet the Internal Revenue Code’s definition of an accredited investors and/or qualified purchaser or are an institutional investor.1   PPLI policies are customized, flexible, and tailored to the unique needs of each policyholder.  It is typically used as part of an overall wealth management strategy to help preserve and transfer wealth to future generations.

One of the main features of PPLI is that it allows policyholders to invest their premiums in a variety of investment options, including hedge funds, private equity funds, and other alternative investments that are usually highly tax inefficient and not typically available in traditional life insurance policies.  This allows policyholders to potentially generate higher returns on their investments, although it also carries the risk of investment losses.

PPLI policies also offer a range of tax benefits that can make them an attractive option for certain investors.  For example, policyholders may be able to defer taxes on investment gains until they withdraw funds from the policy, or they may be able to escape taxation altogether if the policy is structured at the onset to do so or if the policy is held until the death of the insured.2,3  

Because PPLI policies are highly customizable and complex, they are typically sold through private placements, meaning they are only available to a limited number of investors who meet certain criteria.  As a result, PPLI policies are not regulated by the same laws and regulations that govern traditional life insurance policies, and they may involve higher fees and costs than other insurance products.

PPLI differs from traditional life insurance in several ways.  First, with PPLI, each party to the transaction functions in the role to which they are best suited instead of the life insurance company handling most, or all, functions.  For instance, with most retail policies, the insurer accepts and holds the premium in its general account. The retail insurer then makes all the investment decisions about how to invest the premium and how much of the yield to share with the policyholder. All policy assets held in the insurer’s general account are subject to the claims of any creditors.

On the other hand, with PPLI, the insurer holds a policy’s premium separate from its general account where it is segregated and not reachable by the insurer’s creditors.  This layer of creditor protection and the knowledge that the financial fortune of their investments is not dependent upon the financial fortune of the insurer is a top reason why PPLI is so attractive to affluent individuals.  

Another difference between PPLI and retail insurance is the PPLI insurer’s ability to accept the policyholder’s choice of investment manager and custodian to choose how to invest and hold the premium, which becomes the policy’s cash value.4  The PPLI insurer continues to provide the life insurance policy structure but, unlike a retail insurer which retains much of the death benefit risk, a PPLI insurer reinsures most of the death benefit risk with major, highly rated reinsurance companies.  In other words, because there is a sophisticated policyholder who has access to professional investment management, most of the risk of making sure the policy performs is shifted from the insurer to the policyholder.

Perhaps one of the most recognized benefits and advantages PPLI has over retail life insurance is its lower, institutional pricing.  Where retail insurance products such as whole life and universal life have higher expense loads and a lack of transparency, PPLI is priced and bundled like an investment.  Fees and costs are clearly listed and, unlike most retail insurance products which carry surrender charges for as long as twenty years, PPLI policies generally do not carry surrender charges and can be surrendered without a penalty.

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  1. 1 Private placement products offered by U.S. carriers to U.S. persons are subject to SEC regulations.  Each purchaser generally must be a ”qualified purchaser” under §2(a)(51) of the Investment Company Act of 1940, 15 USC §80a-2(a)(51), and/or an “accredited investor” under §501(a) of Regulation D of the 1933 Act, 17 CFR §230.501(a).  A “qualified purchaser” is an individual or a family-owned business that owns $5 million or more in investments.  An “accredited investor” is anyone who meets one of the below criteria: Individuals who have an income greater than $200,000 in each of the past two years or whose joint income with a spouse is greater than $300,000 for those years, and a reasonable expectation of the same income level in the current year.  
  2. 2 Income tax-free loans available if policy is structured as a non-Modified Endowment Contract.  Access to cash values through borrowing or partial surrenders will reduce the policy's cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.  
  3. 3 IRC §101(a)(1)
  4. 4 IRC §817(c).  A “separate account” is a separate set of financial statements held by a life insurance company, maintained to report assets and liabilities for particular products that are separated from the insurer's general account.  Detailed statutory financial statement data and disclosures regarding the products and assets captured in a separate account can be found in SSAP No. 56—Separate Accounts.

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