Tax Efficiency for US Citizens using PPLI

Investing in Private Placement Life Insurance (PPLI), sometimes referred to as Private Placement Variable Universal Life (PPVUL) either directly or via a Trust, offers innovative tax planning solutions for the reserve of high-net-worth individuals. It allows the cash value to compound tax-free and be distributed tax-free to the policy owner and their estate. No income, capital gains or dividend taxes are imposed upon receipt of mortality proceeds and policies can accommodate tax-free loans and withdrawals.

A wide range of investments within the policy can be selected including equity, fixed income and alternative assets. Furthermore, the policy provides comprehensive withdrawal, loan and cash surrender value options in respect of both the principal and the increase in the cash value.

The benefits of tax-free growth are highlighted below:

This graph shows how investments via PPLI can grow tax-free to ~$185m and enjoy tax-free distributions. By contrast, the same investment in a taxable account would be subject to 45% tax negatively impacting the return significantly to ~$69m.

PPLI are available in a wide range of jurisdictions, and it is important to select the appropriate one to maximize the tax benefits. With respect to US tax planning, Caribbean providers are widely recognised as a suitable jurisdiction and as such, their PPLI options offer advantages over onshore (US) counterparts namely:

• Investment flexibility: Caribbean-based carriers can provide Policy Owners with a great degree of flexibility in respect of both underlying investments and investment managers.
• Segregated account laws:  the Caribbean has robust insurance law and proven segregated account legislation that protects Policy Owners’ segregated accounts from any claims which may be made against the PPLI provider. Each segregated account is totally protected from any potential creditor of the company. This means the Policy Owner’s assets remain segregated and protected at all times.

• Lower policy cost structure
• Insurable interest legislation means that policies are 100% compliant with the IRS Code (IRC 953(d)) which means that it is  treated as if it were a US insurer for tax purposes. As a result, Caribbean based PPLI are entitled to the same tax treatment enjoyed by domestic US Life Insurance companies.

It is important to stress that PPLI is a life insurance contract and must be treated as such to satisfy the tax benefits it provides. It is stipulated (IRC Section 817) that segregated account investments must be “adequately diversified” which in practice means:

• No more than 55% of     total asset value is represented by any one investment;
• No more than 70% of     total asset value is represented by any two investments;
• No more than 80% of     total asset value is represented by any three investments; and
• No more than 90% of     total asset value is represented by any four investments.

However, due to the unique structure of a Caribbean domiciled PPLI, the policy owner is not limited by the ability to insure his/her own life and/or the lives of family members. Therefore, the policy owner does not need to meet insurance eligibility requirements and will not be dependent on the mortality of family members in order to receive mortality benefits. This is particularly important if the Policy Owner has health conditions which can make obtaining life cover prohibitively expensive in turn eroding the cash value or in the worst case, preclude a policy in the first instance altogether. It must be stressed that this is a life insurance contract and must adhere to these principles to qualify for the benefits it offers.

Where an insurance policy is subject to the mortality of a single individual, as in the case for US PPLI, the policy must pay out in full upon the mortality of the insured. Consequently, the assets which constitute the cash value part of the policy should have a high degree of liquidity and thus the choice of policy assets is limited to those with sufficient short-term liquidity to satisfy this requirement. However, the assets in a Caribbean PPLI, do not need to be limited to those which have a high degree of liquidity. Less liquid assets can form part of the cash value by underwriting a pool of lives instead of the policy owner alone. As a result, mortality distributions will be made over an extended period on each insured within the group and so liquidity needs are spread over several decades. This also lowers the cost of cover since lives assured are generally from a pooled group consisting of lives in their mid-30’s. The entire insurance structure is re-insured with a AA+ underwriter to give greater comfort to the Policy Owner and simultaneously meeting the insurable interest requirement to qualify the PPLI.

• In short, Caribbean PPLI meets and complies with IRC Section 7702(a) regarding risk and cash value considerations with IRC Section 101(a) regarding the tax-free nature of the death benefit.
• Fees relating to the deployment of PPLI are broken down as follows:

          Upfront transaction fees to cover legal and other origination expenses.

• Cost to provide the pure insurance element and levied to meet mortality benefits in order to qualify the PPLI.
• Fees for ongoing policy administration and maintenance
• Mortality and expense charges which are similar to a management fee.

The forecast fees are likely to be 3% initial and 1.15% per annum thereafter excluding any other legal, banking or advisory fees not directly related to the PPLI which may be borne as part of the overall advisory. The PPLI provider will work with the legal and/or financial advisor to allay any outstanding concerns and to satisfy themselves with the suitability of the solution. Once the PPLI is initiated and complete, the Policy Owner can be assisted in the preparation of annual IRS tax reporting as per FATCA and CRS requirements.

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