- Key insight: Private-placement life insurance (PPLI) offers the unique ability to funnel excess premiums into alternative assets like private equity while shielding the gains inside an insurance wrapper.
- What's at stake: Wealth managers risk alienating clients and breaching fiduciary trust if they push highly complex PPLI structures to the wrong clients.
- Expert Quote: "There's huge, huge commissions with a lot of these products, and that's why they're being pushed." — John Pantekidis, general counsel and a managing partner at TwinFocus
Advisors of ultrawealthy clients could tap into a type of life insurance that has significant tax benefits, but the situation has to be just right.
Private-placement life insurance is a type of variable universal life insurance that allows excess premiums to grow with the policy's cash value. Interest and gains are tax-deferred, and policy owners can direct allocation to investments, with more choices than typical variable universal life policies. Also, beneficiaries aren't taxed on income they get from the death benefit.
One drawback: it could potentially be subject to estate taxes, unless in an irrevocable trust outside the estate.
"PPLI is a fantastic product, under the right set of circumstances for the right individual," said Michael Leibowitz, founder and principal at Fort Lauderdale, Florida-based Tax Efficient Solutions.
Even so, "it's not my go-to because it's complicated, and the average consumer doesn't like all the complicated features," he added. "You have to match the personality of the client to the product as well, and giving a client who needs something that he can understand — or at least initially trust and get comfortable with — and not giving him something more complicated that he can manage to, is probably the better choice than giving him something he's going to have millions of questions on, feel incompetent with and not understand."
Another advisor urged caution about those who try to sell PPLI products to clients.
"There's huge, huge commissions with a lot of these products, and that's why they're being pushed," said John Pantekidis, general counsel and a managing partner at TwinFocus, a Boston-based registered investment advisor. "It could be a no-brainer using life insurance — but not necessarily PPLI products."
"It's about sitting down with the clients, asking them what they're trying to achieve, and sometimes life insurance makes sense. Sometimes it doesn't," Pantekidis said. "The situation where PPLI specifically [makes] sense is even narrower."
For example, PPLI is a better fit for clients with significant liquidity. Generally, clients would need $5 million or $10 million to open a policy.
PPLI is for clients with "a chunk of money sitting around, and they're like, 'How do I turn this into potentially tax-free money with huge upside and also structured as life insurance that I can potentially borrow against it tax-free?'" said Adam Bergman, founder of Sioux Falls, South Dakota-based IRA Financial, which specializes in self-directed retirement accounts. "It's very cool if you fit the parameters of the benefits."
Although not unique to this type of policy, another strategy is that policyholders can borrow against it.
"The beauty is, 'OK, my kids or my surviving spouse may have less money when I die, but they're rich enough, so let me use the money now.' That's the play," Bergman said.
Investing in alts
Having a net worth of at least $5 million isn't the only criterion for whether PPLI might be a good fit for a client. Another is whether that client is interested in investing in alternative assets.
"The only thing that's different with PPLIs versus other whole life products is you can invest in alts, like private equity," Bergman said. "There's all these characteristics where you have to have certain diversification, and you obviously can't have control over the investments. You need a third party that basically is in charge of making the investments. You can't be in charge of it."
Back in 2024, Senate Finance Committee Democrats released a report, considering PPLI a tax shelter.
With insurance companies highly likely to follow the rules, it is difficult for the IRS to pursue this strategy unless Congress changes statute, and audit risk isn't high, he added.
Bergman said, from his perspective as a tax lawyer, it is "an unbelievably tax efficient product."
Introductory bullet points created by AI with editorial review.
