Private Placement Life Insurance (PPLI) and Private Placement Variable Annuity (PPVA) are wealth planning tools used by family offices and high-net-worth individuals to invest in a tax efficient manner and transfer wealth to future generations more effectively.
Tax-efficient asset location
PPLI and PPVA are institutionally-priced variable life insurance and annuity contracts that allow clients to invest on a long-term, income tax deferred and/or tax-eliminated basis. These structures can function as a tax-efficient “asset location” for clients who otherwise invest in tax-inefficient asset classes and strategies.
Unlike traditional insurance contracts, contract fees and costs are fully-transparent and disclosed upfront. Further, the contract investment account is considered segregated from the general assets and liabilities of the carrier.
PPLI vs. PPVA
PPLI requires medical underwriting, assets inside the contract grow tax-deferred, and proceeds are payable income-tax free upon death. If structured properly, the client can borrow tax-free against the cash value of the contract. PPLI is often used for asset protection, wealth transfer, and tax-advantaged savings.
PPVA does not require medical underwriting, and assets inside the contract grow tax-deferred during the client’s lifetime. Any profits inside the contract are taxed as ordinary income either upon surrender or death. PPVA is often used for tax-advantaged investment by clients, asset protection and charitable planning.
If the PPVA holder surrenders the contract before age 59 ½, they will be subject to a 10% tax/penalty on any profits accumulated inside the annuity.
For additional confidentiality and asset protection, US based clients can fund their contract through an offshore carrier (i.e. Bermuda 953-d elect carrier). 953-d elect carriers are subject to the same tax provisions and requirements as US based carriers. Upon surrender, proceeds are taxed according to the client’s home jurisdiction.
PPLI / PPVA investment options
Insurance Dedicated Funds (“IDFs”) are pooled funds that are often structured to closely parallel an investment manager’s existing fund offering (i.e. hedge fund, private equity fund, private credit fund, real estate fund, fund of funds, etc.). An IDF is a commingled vehicle that allows multiple policyholders (clients) to invest into the same portfolio.
Separate Managed Accounts (“SMAs”) are custom portfolios structured for individual policyholder clients by their advisor,
and comply to a specified investment mandate approved by the insurance carrier. They are particularly popular with clients
that prefer their PPLI or PPVA portfolio be managed according to a bespoke investment mandate agreed to in advance
with their advisor.
An SMA can comprise of IDFs, and the following investment options:
Stocks, Bonds, & ETFs
Mutual Funds
Hedge Funds
Private Credit
Private Equity
Real Estate
Oil & Gas
Practical PPLI & PPVA applications
Private equity
Enhance the net-of-tax return of investments otherwise subject to short term capital gains and ordinary income, as well as eliminate K-1 reporting for investments held within the contract.
Tax-Inefficient Investments
Venture capital
Utilize PPLI inside of dynastic and irrevocable (estate and GST exempt) trust structures to defer/potentially eliminate income tax on investment assets eventually passing to future generations.
Wealth Transfer & Trust Planning
Hedge funds
Compound wealth on long-term, tax-deferred basis via PPVA; further, when charity is named as beneficiary, proceeds are paid tax-free to tax-exempt entity (family foundation, endowment or other qualifying charity).
Hedge Funds
Utilize PPVA for long term tax-deferral while residing in high income-tax states (i.e. NY, CT, IL, CA), while maintaining optionality to redeem contract and pay tax when residing in lower income tax state (i.e. TX, NV, FL).
Pre-Immigration Planning
Client can 1035 exchange existing retail annuities into an institutionally-priced PPVA, and select advisor or RIA to manage custom portfolio on their behalf inside of contract.
Retail Annuities
Certain clients (i.e. uninsurable) can repurpose existing in-force life insurance to create a tax-eliminated “asset location” via PPLI, without requiring new insurance or medical underwriting.