PPLI is a life insurance product designed for high net worth investors. As a result of the reduction in investment return due to taxes, I am often asked about tax-advantaged investment structures. By virtue of the powerful lobbying influence of the life insurance industry, insurance has had a long history as a tax-advantaged investment vehicle. Insurance carriers both inside and outside the U.S. offer customized PPLI 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 vehicle.
PPLI offers investors the ability to select asset managers. Retail insurance product does not. This is attractive to high net worth clients because they want investments that involve more sophisticated strategies than traditional “long only” mutual fund investing. Their motivation for investing in PPLI differs substantially from the reasons for purchasing retail life insurance. PPLI is an investment vehicle whose main goals are income, capital gains and estate tax savings along with asset protection, while maximizing investment choices and incurring as little insurance cost as possible.
PPLI investment vehicles provide income and estate tax efficiencies completely within the parameters of U.S. tax law. The tax advantages 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 can be used to access policy assets. There are enhanced tax and other advantages available by acquiring an offshore PPLI policy. Proper use of PPLI techniques maximize your ability to build, transfer and preserve wealth for generations.
The core motivation for acquiring PPLI is to establish a tax-free investment environment, at the lowest possible cost, in which an investor may designate a money manager to manage the policy assets. The death benefit component of the policy is considered a secondary benefit.
High net worth individuals want to globalize their holdings and protect them from creditor risk. PPLI is an excellent asset preservation vehicle, particularly when coupled with sophisticated offshore planning. Offshore PPLI, combined with offshore trusts achieve the goals of income, estate, gift and generation-skipping transfer tax planning along with wealth preservation planning.
Many offshore jurisdictions offer legislation which include a pro-debtor regime, as well as greater confidentiality and financial privacy. Similar laws in the U.S. do not compare
When investments that are not income tax-efficient (such as hedge funds) are held inside PPLI, the tax advantages of the insurance enhance the performance of the underlying investments.
Clients analyze the rate of return provided by the tax-free build-up inside PPLI (coupled with the estate tax exclusion benefit of owning the policy inside a Low Profiler ILIT), and purchase insurance in order to:
PPLI is used primarily as an investment vehicle to enhance the rate of return of investments such as mutual funds, and particularly hedge funds which are not income tax-efficient. By maintaining these investments inside a PPLI these investments become tax efficient. Stock and bond portfolios also can be used in a PPLI structure.
The PPLI structure allows policyowners to change fund managers and investment styles to meet their investment objectives by reallocating assets among investment funds available within the PPLI contract.
PPLI contracts are usually issued as variable universal life insurance policies (VUL). This permits PPLI to be particularly effective for investment purposes. These features include:
In order for the policyowner to receive the tax advantages of holding investments inside the PPLI policy, the owner must have limited control over the investments. The policyowner cannot dictate to the fund manager what specific assets should be owned by the policy. But the policyowner can choose the fund manager.
The tax benefits of life insurance include:
PPLIs are sophisticated and there are many traps for the unwary. Some of the tax traps that have to be addressed (and that can be avoided) by tax professionals are:
Example: Client wishes to eliminate tax on his stocks and bonds. Client acquires a PPLI policy and transfers his investments into the Platform with an installment sale. Subsequent growth and income is not subject to taxation. Upon client's death, the death benefit received by the beneficiaries of the life policy is income and estate tax free.
For optimal price efficiency, the total premium commitment should be at least $1 million. If the investor wants to have the flexibility to withdraw policy assets, or borrow policy assets on a tax-advantaged basis, the premium commitment should be paid in over four to five years.
The premium load will vary, but is typically 1.5 to 2%.
Investors are drawn to PPLI for its tax benefits and investment flexibility. They are not drawn to PPLI for its life insurance benefit. However, the insurance component is critical and there are many technical insurance issues to address in the process of acquiring a PPLI product. It is advisable to engage legal counsel.
Acquiring PPLI requires that the prospective insured undergo medical and financial underwriting typically in the Cayman Islands where the major carriers do business or in an agreed country outside the U.S.
In addition, a policy issued by an offshore carrier should have an offshore legal owner, it is necessary for the investor to establish an offshore trust to own the policy. Moreover, there are several important insurance design elements that must be carefully addressed in the policy acquisition process.
The income tax-free death benefit consists of the cash value of the policy (the premiums paid, plus growth) plus the insurance element.
The insurance element will be minimized to the extent possible in the design process, and its amount will be determined with reference to U.S. tax rules. Insurance risk coverage in the offshore market is provided by the same reinsurance companies that reinsure domestic life insurance carriers.
The separate accounts of the policy will be held in accordance with the asset manager’s normal custodial arrangements. There is no requirement of offshore custody. The separate accounts are protected by law in the offshore jurisdiction where the carrier is located from both the creditors of the insurance carrier, the creditors of other policy holders and most important, provided the policy is held by a Low Profiler ILIT (Insurance Trust), the creditors of the policy purchaser.
The key legal concepts, based on insurance and tax law, are:
The offshore companies we use all have tax opinions explaining the legal and tax concepts of life insurance and are available to policy purchasers.
Yes. The Platform is based on concepts of insurance and tax laws that have been around for decades, and are not new or exotic. We have thoroughly researched and analyzed the legal and tax issues involved.
A life insurance policy complying with all the US tax laws is an essential component of this planning and, when properly established, tax are obtained.
Alan R. Eber J.D., LL.M. is the primary attorney involved in the design and uses of the Platform. He has spent many years researching and perfecting the planning techniques and application.
The key components of the Platform (i.e., the use of a Low Profiler ILIT to own the policy and the tax principles of life insurance) have been Court tested. Numerous Internal Revenue Code sections are applicable, and many rulings and regulations have been issued interpreting these Code sections, all resulting in straightforward rules and guidelines.
Another key concept is that the installment sale and the promissory note sometimes received in exchange for assets transferred into the policy must be at arms-length. Therefore the note must be equal to the fair market value of the assets transferred and the interest rates must be at least equal to the IRS published minimums.
A foreign corporation would not work under US tax law because of the Controlled Foreign Corporation (CFC) and the Passive Foreign Investment Corporation (PFIC) rules
Tax changes are generally not applied retroactively. The insurance industry has a powerful lobby that would guard against changes to the tax concepts involving life insurance.
The answer depends upon the type of assets involved, the design the client wants and the Platforms intended uses. Generally the cost runs between $15,000 - $35,000 in legal and set-up costs.
Typically to justify the cost of the planning, the client needs to transfer at least $1 million into the Platform.
Policies that are set up as a Non Modified Endowment Contract (non "MEC) allow for policy withdrawals and policy loans on a tax advantageous basis.
Through proper structuring, offshore PPLI can be used as part of a family’s estate planning combining estate, gift, and generation-skipping transfer tax benefits.
Many offshore jurisdictions stipulate that insurance policies must be held in strict confidence. Offshore PPLI provides a high degree of privacy and confidentiality.
Subject to the policy meeting specific diversification rules, the type of investments that can be held in the segregated policy account is unlimited. While the client is prohibited from exercising control over the selection of securities, a manager, recommended by the client, may make investment decisions.
Offshore carriers offer premium payments, investments, withdrawals, borrowings, and death benefits in a variety of currencies. `
A number of offshore countries have enacted insurance law which provides flexibility and protection. The Cayman Islands confidentiality laws provide a barrier to frivolous claims
Mutual funds generate taxable income. Both domestic and offshore PPLI, provide for:
The above have powerful and compelling results. The client trades paying taxes on portfolio turnover, anywhere from 15% to 50% of the annual pre-tax returns, for the cost of the insurance wrapper, which averages approximately 1.5 to 2% per year. This treatment applies to all life insurance policies.
Investor control. In order to qualify as life insurance, the client cannot exercise control over the specific investment decisions made. The client can choose among investment managers but cannot direct a manager to purchase a particular investment.
Code Section 817(h) ; Rev. Rul. 77-85, 1977-1 CB 12 ; Rev. Rul. 81-225, 1981-2 CB 12 ; Rev. Rul. 82-54, 1982-1 CB 11 provide that "the ability to choose among broad investment strategies such as stocks, bonds, or money market instruments, either at the time of the initial purchase or subsequent thereto, does not constitute sufficient control over individual investment decisions so as to cause ownership of the private mutual fund shares to be attributable to the policies."
Domestic life insurance carriers require premium to be paid in cash. Offshore PPLI carriers allow premium to be paid “in kind.”