PPLI vs. Traditional Life Insurance: What’s the Difference?
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:
- PPLI tends to have much lower upfront fees relative to traditional coverage
- 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.
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