Life insurance is an important consideration when it comes to securing your family’s financial future. In the event of your death, life insurance policies can provide financial protection to your loved ones, ensuring that they are taken care of in your absence. However, not all life insurance policies are created equal. For high net worth individuals, a private placement life insurance (PPLI) policy can offer unique advantages over traditional life insurance policies.

In this article, we’ll explore the differences between PPLI and traditional life insurance, and explain why PPLI may be the better choice for high net worth individuals & families.

Traditional Life Insurance

Traditional life insurance policies operate in a relatively simple manner. Policyholders pay a premium in exchange for a death benefit that is paid out to their beneficiaries when the insured dies. After premiums are paid, insurance charges are deducted and the net premium is invested in some sort of mechanism, dictated by the policy type. In the case of traditional variable universal life (VUL), this net premium is allocated to the carrier’s “segregated” account that is separate from the general account (thus not subject to the carrier’s creditors). 

Limited Investment Pool

One of the main drawbacks of traditional VUL policies is that they limit investment choice to a pre-selected pool of options. Similar to the investment selection of a 401k menu, there are typically anywhere between 75-150 funds to choose from. Also, these funds do not include alternative style investments, thus limiting the potential growth of the cash value.  As a result, traditional life insurance policies may not be an ideal option for qualified purchasers and/or accredited investors who are seeking to grow their wealth tax-efficiently and with more significant returns.

Accessibility 

It’s essential to note that traditional life insurance policies are generally more accessible than PPLI policies, as they do not require nearly as significant investment upfront. However, traditional life insurance policies do not offer the same level of flexibility and customization over investment selection as PPLI policies.

PPLI (Private Placement Life Insurance)

Private placement life insurance (PPLI) policies operate in a similar manner to traditional life insurance policies. However, PPLI policies are specifically designed for serving as a tax efficient wrapper for tax inefficient assets.. Also, with a PPLI policy, the policyholder can invest  in a separately managed account (SMA), which can be customized relative to the fixed menu of “off the shelf” offerings on the carrier’s platform. These SMAs can hold a range of investment types, including hedge funds, private equity, private credit and real estate to name a few.

Tax Efficiency

One of the most significant benefits of cash value life insurance policies is tax efficiency. PPLI policies allow policyholders to defer taxes on their investment gains and income while the policy is active. Additionally, PPLI policies can provide tax favored access to policy distributions, either by withdrawing up to cost basis tax free or utilizing tax free policy loans. The death benefit is also received tax free by the policy holder’s heirs. 

Asset Protection and Estate Planning Benefits

PPLI policies can also offer asset protection and estate planning benefits. PPLI policies are typically structured to provide a level of asset protection, shielding investments from creditors and lawsuits. Additionally, PPLI policies can be designed to reduce estate taxes, providing a tax-efficient way to transfer wealth to the next generation.

PPLI vs. Traditional Life Insurance

When comparing PPLI and traditional life insurance policies, the key differences lie the investment flexibility, costs and liquidity. Since life insurance policies grow tax deferred, they trade off investment tax drag for insurance costs. Assuming the policies are designed properly, these insurance charges for the death protection are minimized and this can be a very favorable trade-off.  PPLI amplifies this trade-off versus traditional coverage in two ways:

1. PPLI tends to have much lower upfront fees relative to traditional coverage
2. PPLI allows the underlying investments to be comprised of assets with higher return potential but that would normally come with higher tax drag. PPLI eliminates the tax drag while keeping the higher return potential 

PPLI vs. Traditional Life Insurance: Which Is Right for You?

For high net worth individuals who seek to grow their wealth and manage their investments in a tax efficient manner with greater flexibility, PPLI policies may be the better option. However, PPLI policies require a significant investment upfront and may not be accessible to everyone. 

If the goal is to minimize premiums paid for maximum death benefit coverage traditional life insurance policies can serve as a very effective tool for estate liquidity and generational wealth leverage for your loved ones. However, if you’re a high net worth individual looking to grow your wealth tax-efficiently, protect your assets, and provide ancillary estate planning benefits, a PPLI policy may be the better choice for you. By working with a knowledgeable wealth advisor, you can explore your options and make an informed decision that meets your unique financial goals and needs.

If you’re interested in learning more about PPLI and how it can help you achieve your financial goals, contact Centura Wealth Advisory today. Our experienced advisors can help you create a customized wealth management strategy that meets your needs and provides the protection and growth you deserve.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein.  All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice.  We recommend that you seek the advice of a qualified attorney and accountant.

For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).  Please read the disclosure statement carefully before you engage our firm for advisory services.

Private Placement Life Insurance (PPLI) is a financial tool that offers unique benefits for high net worth individuals. PPLI is a form of life insurance designed for accredited investors and qualified purchasers, providing a broad range of investment options with significant tax advantages. 

In this article, we will explore the benefits of PPLI and compare it with traditional life insurance coverage.

What is PPLI?

In a nutshell, PPLI serves as a tax efficient wrapper for tax inefficient assets. It is essentially a tailored variable universal life insurance policy that is offered exclusively to accredited investors and qualified purchasers, allowing for a wider array of investment options that can include alternative style investments (i.e., such as private equity, private credit, hedge funds, etc..). These policies are treated as private offerings that when structured properly, can be highly customized to suit the policy holder’s needs & investment philosophy. PPLI is often designed as a highly tax efficient investment vehicle that provides tax-deferred growth on the policyholder’s underlying investments as well as tax favored distributions from the policy. 

How Does PPLI Work?

The Mechanics of PPLI:

PPLI operates similarly to cash value universal life insurance contracts. It provides a death benefit to beneficiaries when the insured passes away. The policyholder pays an insurance premium, which, after deducting insurance fees, is allocated to an investment mechanism that generates a cash value component. The growth of this cash value depends on the net performance of the underlying investments and the deduction of ongoing insurance charges. If the investment performance exceeds the policy charges in a given year, the cash value increases. As long as the cash value remains above zero, the policy remains active.

Maximizing Premiums within IRS Limits:

In PPLI, policyholders often pay the maximum allowable premium relative to the death benefit set by the IRS. This approach minimizes the costs associated with insurance protection (death benefit). With proper asset management, the tax-deferred investment performance within the policy tends to outperform the costs of insurance over time. When comparing similar investment strategies outside of PPLI, policyholders make a trade-off. They trade the tax drag on investments outside the policy for the insurance fees within the policy. When structured correctly with suitable investments, this trade-off favors the “tax efficient” PPLI vehicle, with insurance charges minimized compared to outside investment tax drag.

Segregated Account and Investment Options:

Since PPLI falls under the category of variable universal life insurance, the net premium is allocated to the carrier’s segregated account, separate from the general account and protected from creditors. The segregated account consists of various pre-determined investment options provided by the carrier, including a range of alternatives. These options are fixed or locked-in, similar to investment offerings in a 401K menu. However, the inner workings of the segregated account can be highly customized by utilizing separately managed accounts (SMAs), creating customized insurance dedicated funds (IDFs), or a combination of both.

By understanding the mechanics of PPLI and utilizing the flexibility offered within the segregated account, individuals can optimize their tax efficiency while protecting their assets and beneficiaries.

PPLI vs. Traditional Life Insurance: What’s the Difference?

Traditional Life Insurance

Permanent life insurance (regardless of PPLI or traditional) provides a death benefit to beneficiaries upon the policyholder’s death. It also offers the following four tax advantages (assuming Non MEC status):. 

1. Tax deferred growth of underlying investments (i.e., cash value)
2. Ability to withdraw funds tax free, up to the cost basis in the policy
3. Ability to loan from the policy tax free, via direct carrier loan or pledge the policy for collateral (VUL & PPLI policies will have more stringent collateral requirements relative to fixed insurance products such as Whole Life)
4. Death proceeds are received income tax free to the beneficiaries 

Traditional life insurance has several limitations, such as limited investment options, higher relative fees, and inflexibility. With traditional VUL, policyholders are restricted to investing in a limited number of funds chosen by the insurance company. As a result, they miss out on the potential for higher returns that alternative investments can offer. Traditional life insurance also tends to have higher upfront fees and expenses that can eat into the policy’s returns and delay a positive return on investment. Finally, traditional life insurance policies are less flexible and often include surrender charges. 

PPLI Investment Flexibility and Tax Efficiency

PPLI, on the other hand, offers a range of investment options with tax-deferred growth. Policyholders can allocate their investments to various asset classes, including private equity and hedge funds. This offers PPLI a significant tax advantage over traditional life insurance as policyholders can invest in a range of assets that offer higher growth potential, without taking on the added tax drag often associated with some of those investment classes. This makes PPLI an attractive option for those looking to minimize their tax liability.

How PPLI Supports Tax-Efficient Financial Planning

Asset Protection and Estate Planning Benefits

Asset protection and estate planning benefits are significant advantages of PPLI policies. One of the primary benefits of PPLI is its ability to provide maximum asset protection. By shielding assets from potential lawsuits and creditors, PPLI policies can help protect the wealth of high net worth individuals who are at greater risk of being sued. This protection is possible when the policy is owned by an irrevocable trust, assuming the policy holder is not a named beneficiary (unless drafted in a self-settled spendthrift state)

Estate Planning Benefits

PPLI can also be an effective tool for estate planning. Policyholders can transfer their wealth to future generations while minimizing estate taxes by using PPLI. The policy is held in an irrevocable trust outside the taxable estate, and when the insured(s) passes away, the death proceeds are paid out to their beneficiaries free of income and wealth transfer tax. This influx of liquidity can then be used for estate taxes. Additionally, PPLI policies can be structured to allow for gifting to beneficiaries, which can further reduce the policyholder’s taxable estate. This can be particularly beneficial for individuals with large estates who want to ensure their assets pass on to their heirs in a tax-efficient manner.

Tax Benefits

As previously mentioned, the tax benefits of PPLI make it an attractive option for high net worth individuals looking to invest in a tax-efficient manner. One of the key benefits of PPLI is tax-deferred growth. Policyholders can invest in a range of assets, and any gains on these investments are deferred from taxes until the policy is surrendered (not  taxed at all if planned appropriately). 

Good and Bad Investments for PPLI

While PPLI offers a range of investment options, it is important to not only choose investments that are suitable for the policyholder’s investment objectives and risk tolerance, but also balance in investments that tend to generate unfavorable taxable income while also providing the potential for attractive returns. These include private credit, high turnover hedge funds, direct lending, private equity, etc. However, there are also various risks associated with certain investments. For instance, investing in hedge funds may lead to high mgt. fees and volatility. Private equity investments may also be risky due to the lack of liquidity and potential for significant losses. It is important to conduct due diligence and carefully evaluate the risks associated with each investment before making a decision.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein.  All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice.  We recommend that you seek the advice of a qualified attorney and accountant.

For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).  Please read the disclosure statement carefully before you engage our firm for advisory services.