It is a special type of life insurance, structured to have a high cash value compared to a relatively low death benefit. The goal of PPLI is to build up significant cash value whilst taking advantage of the tax and estate planning benefits of a life assurance policy. PPLI is a variable life insurance policy that allows you to allocate to bespoke investment strategies which wouldn’t be available within traditional universal life policies.
PPLI is a US innovation dating back nearly 40 years, designed specifically for wealthy families and hedge funds to mitigate their tax exposure with the effective use of an insurance contract while meeting the guidelines laid down by the IRS. Since then, it has been deployed in other jurisdictions to provide a robust option for families seeking tax efficiency, privacy and inter-generational wealth solutions.
Historically, families would use a combination of Trust and Offshore Company structures but many of these have become outdated by changes in legislation and the global cooperation of Governments. The Panama/Paradise/Pandora Papers highlighted that confidentiality within offshore structures no longer exists (between heirs perhaps but not Governments) which was reinforced with similar legislation of DOTAS (Disclosure of Offshore Tax Avoidance Schemes), GAAR (General Anti-Avoidance Rules), CRS (Common Reporting Standards) and FATCA to name but a few.
In general, offshore company structures were low cost holding vehicles to create a corporate platform to conduct global business activities. Unfortunately, they were abused, and some jurisdictions were blacklisted as result which further increased Governments to legislate against them due to their opacity and shady perception.
Trusts, have suffered similar pressure to report the details of the principals and beneficiaries combined with fiscal penalties on assets depending on where they are located. Trusts are not for every family since giving up legal ownership and control can be unnerving to the uninitiated with increasing costs for the ongoing reporting, KYC/AML and related activities.
There are many permutations, each one is tailored to the needs of the family, so the jurisdiction, Provider and the type of assets with the required outcome(s) must be understood at outset. Assets are widespread and not limited to only securities, bonds, private equity, property, jets, super yachts, art, private debt to name but a few.
Tax - Most Governments legislation supports insurance structures and in turn offer fiscal incentives when deployed correctly. These tax concessions culminate in tax deferral, reduced or no estate tax, mitigation of withholding tax on dividends, no capital gains tax. PPLI is not regarded as a foreign corporation so no disclosure to tax authorities or any breach of CFC Rules. With the effective use of DTA (Dual Taxation Agreements), PPLI is highly regarded not only as an effective estate blocker but the ability to recoup withholding tax.
Confidentiality - The PPLI is the legal owner of the assets by transferring the same into the structure. The PPLI acts as the beneficial owner of the assets and the UBO (now referred to as the Policy Holder) does not give up any control unlike that of a Trust. Policy Holder protection affords a great deal of privacy in addition to the tax benefits coupled to full control of assets with ease of asset transfer on death through beneficiary designation (no probate). PPLI can protect from creditors in the case bankruptcy and asset protection for complex divorce cases thereby ensuring heirs are secured.
Estate - complex families have complex affairs with assets in many jurisdictions. On death, typically probate can take many months/years thereby denying the family and/or business of much needed liquidity at a particularly delicate period. PPLI with pre-designated beneficiaries (which can be changed at any time). obviates probate and assures assets as passed promptly away from the Courts. PPLI can rarely be challenged in this regard, and if structured correctly, can be made Shariah friendly to accelerate transfer of assets and preclude forced heirship rules.
Ease of Reporting - CRS demands the custodian report balance/value at year end, interest/dividends credited, other income generated, redemption of assets and the amount credited/withdrawn for the principal. PPLI only requires balance/value year end and amounts credited/withdrawn. The former clearly is manpower intensive ergo expensive and private families do not wish this type of information to be widely distributed in case of error and/or security concerns.
PPLI benefits far outweigh the costs in most cases if the solution is relevant and structured correctly. The amount of tax it saves, the privacy it provides and the peace of mind for families in the preservation and/or passing of wealth is invaluable. Indicative costs can be disclosed once the potential solution is summarised with the relevant parties.
Please view the Case Studies for practical applications of PPLI.
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