Private Placement Insurance (PPI) vehicles have steadily gotten more attention in the high-net-worth space over the past few decades. These vehicles use the benefits of a cash value life insurance or annuity structure paired with investments in alternatives or other private placement type funds. Investors into these vehicles typically need to be both “accredited investors” and “qualified purchasers” outlined by the IRS, which places net worth and/or income requirements to qualify for this type of insurance structure. PPI can allow investors to grow assets tax-free or tax-deferred over their lifetime while retaining retain access to those assets when needed. As with most insurance products, these vehicles may have costs associated with them, which must be weighed against any tax benefit to understand the benefit for each investor.
The two types of PPI are Private Placement Life Insurance (PPLI) and Private Placement Variable Annuity (PPVA).
Private Placement Life Insurance:
With PPLI, a thorough underwriting process is required. The underwriting process is both financial and medical, includes a physical examination and a comprehensive review of the insured’s recent medical history. Once the insured is approved, the policy owner pays a premium(s) into a contract.
- The cash value (resulting from the premium(s) paid over and above the insurance cost) grows income tax-free.
- The policy owner retains tax-free access to the cash value, first through withdrawals up to basis, followed by borrowing the remaining cash value in excess of basis. The death benefit is received by the beneficiary of the insurance policy free of all income tax.
- If the contract is surrendered, the owner will pay income tax on the portion of the proceeds attributable to the growth of cash value.
Private Placement Variable Annuities:
Although PPVAs are similar, there are some key differences:
- There is no underwriting involved since there is no death benefit associated with the variable annuity.
- The policy owner pays a premium(s) into a contract, and the cash value grows income tax-deferred.
- Access to the cash value is limited to withdrawals or contract surrender. Any growth in value is taxable, and any partial withdrawals are considered to come from growth.
- Although there is no death benefit, cash value growth can be income tax-free when a charity is the primary beneficiary of the annuity upon the owner’s death.
Investments inside of a PPLI and PPVA structure may have different restrictions and diversification rules that apply.
- Both structures allow private investments to be held inside of the policies.
- Investments are typically executed using Insurance Dedicated Funds (IDF).
- IDF’s are managed by a company and are a “pre-packaged” product that investors can invest in within the PPLI and PPVA structures.
- There are some firms that are approved to manage separate accounts inside of PPLI and PPVA structures.
- These separate account managers, using the same diversification rules, can customize PPI accounts for investors in an open architecture format to meet individual goals.
To learn more about how PPLI or PPVA structures could help you and your family accomplish its financial goals, reach out to SignaturePRO at signaturepro@signaturefd.com.
