Private Placement Life Insurance
As a result of the ever-present reduction in income and investment return due to taxes, legal and financial advisors are often asked about tax-advantaged structures for passive investments. By virtue of the substantial lobbying influence of powerful interest groups, including the U.S. life insurance industry, life insurance as a financial product has had a long history in the United States as a tax-advantaged investment vehicle. Certain insurance carriers with well established operations both inside and outside the United States offer customized “private placement” policies that are fully compliant with U.S. tax rules and are therefore fully entitled to the preferential tax treatment enjoyed by life insurance. A U.S. tax compliant life insurance policy represents a conservative and cost effective investment opportunity.
Private Placement Life Insurance (PPLI) offers qualified U.S. investors the ability to select asset management tools beyond the limited choices offered in retail life insurance products. This is particularly attractive to high net worth clients because they may have investment mandates that involve more sophisticated strategies than traditional “long only” mutual fund investing. In general, an individual’s motivation for investing in a PPLI policy differs substantially from the reasons for purchasing life insurance. For a high net worth person, PPLI represents an investment vehicle, with the main goals being income tax, capital gains, and possible estate tax savings while maximizing investment choices and incurring as little cost as possible.
Please note: PPLI policies are not in the same class as products sold by traditional insurance salesmen.Rather, they are individually customized investment vehicles that are available only to high net worth persons.
These individually customized investment vehicles provide U.S. income and estate tax efficiencies completely within the parameters of U.S. tax law. The U.S. federal income and capital gains tax advantage of life insurance are the same whether the policy is acquired onshore or offshore. Earnings on policy cash values, including dividends, interest, and capital gains are not taxable to the policy owner because they accumulate within the policy. In addition, withdrawals and policy loans by the policyholder can be used to access policy assets during the lifetime of the insured. There are enhanced tax advantages available by completing all aspects of the transaction offshore and acquiring a PPLI policy issued by an offshore carrier.
Basically, the policy is much more efficient than a domestic policy due to lower internal and external costs.
There is:
- No Federal Tax on the Carrier
- No State Tax on the Carrier
- No State Premium Tax
Furthermore, offshore companies usually pass on their reduced marketing, regulatory compliance and reporting costs to the policyholder in the form of lower fees. When insuring their risks, offshore carriers have the choice of contracting with any one or more of the world-class re-insurers participating in the worldwide life insurance market.
The Unique Advantages Of PPLI Policies
The Account Is Segregated. The assets inside a PPLI policy are separated from the general account. This protects the policy assets from the claims of any possible creditors of the life insurance company.
“In Kind” Premium. Traditional domestic life insurance carriers require premium to be paid in cash. PPLI carriers allow premium to be paid “in kind.” This means many assets that can be assigned a value or are marked to market may be used as premium.
The PPLI Arena
The PPLI arena, and in particular the offshore PPLI arena, is marked by the absence of high-pressure marketing that plagues the domestic retail life insurance business.
High net worth individuals in the United States often want to globalize their holdings in a manner that protects them from future creditor risk. Due to its preferred status under many state exemption statutes, life insurance presents an excellent asset preservation vehicle for people of high net worth, particularly when coupled with sophisticated offshore planning. Offshore life insurance, combined with offshore trusts, may achieve the goals of integrating estate, gift and generation-skipping transfer tax planning along with income tax planning and wealth preservation planning.
Many offshore jurisdictions offer legislation related to life insurance contracts, which is comparable to, or better than, similar legislation under U.S. state law. Such offshore legislation may include specific exemption language and a pro-debtor regime, as well as greater confidentiality and financial privacy. Similar laws in the United States do not generally compare.
The benefits of international PPLI include:
- Individually customized investment vehicles
- Tax advantaged growth
- They generally allow for tax-free loans
- Lower premium and internal costs
- Flexible investment opportunities
- Favorable governing law
- Wealth preservation and growth
Visit Our Asset Preservation Section
Sage Capital Advisors, Inc (“Sage”) is registered as an
investment advisor with the Office of Financial Regulation of the Florida Financial
Services Commission. The information and opinions contained in this document
are for background purposes only and do not purport to be full or complete,
and is subject to change. No representation, warranty, or undertaking, express
or implied, is given as to the accuracy or completeness of the information or
opinions contained in this document, and no liability is accepted as to the
accuracy or completeness of any such information or opinions. Sage does not
provide tax, legal, or accounting advice. In considering this material, you
should discuss your individual circumstances with a tax, legal and/or accounting
professional before making any decisions.
This document is not an offer, nor the solicitation of an offer, to enter into an investment advisory contract with Sage.