This Insurance Policy Works Like a '2-Way Roth IRA,' UHNW Advisor Says

Retirement savings nest egg

What You Need to Know

Private placement life insurance has the power to convert highly inefficient taxable investments into tax-efficient ones.
Using PPLI is easier and more flexible than many advisors and clients think, says Cresset’s Aiden Elliott.
Drawbacks include potentially higher fees and possible future regulatory scrutiny.

Private placement life insurance is a potentially powerful solution for wealthy individuals in high tax brackets. Aidan Elliott, a director of alternative insurance solutions at Cresset, likens PPLI to “a two-way Roth IRA with none of the income or age limitations.”

But there are many lingering misunderstandings about how it works, even among advisors who specialize in serving wealthy clients, says Elliott, who specializes in building customized estate planning solutions and sophisticated life insurance portfolios for ultra-high-net-worth families.

“It is of little surprise that something as complex as private placement life insurance would be misunderstood,” Elliott recently told ThinkAdvisor. “In our conversations with clients and advisors across the country, misconceptions surrounding the strategy surface time and time again.”

Prior to joining Cresset, Elliott was a director of private placement services at WealthPoint in Denver, where he served ultra-affluent and entrepreneurial family groups, as well as their advisor teams. In that role, too, Elliott says, even savvy clients and advisors tended to lack key insights about the potential uses and downsides of PPLI.

While not a tool that is suitable for every affluent client, Elliott suggests, advisors hoping to win and retain UHNW clients (and to keep their loyalty through the generations) should study up on PPLI.

What Is PPLI?

Defined most simply, private placement life insurance is a type of variable universal life insurance vehicle that allows investments contained within the policy to grow, all while the income and capital gains taxes are deferred. PPLI policies contain a wider variety of investment options than typical VUL policies.

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As Elliott explains, PPLI is well-suited to hold interests in various asset classes, including hedge funds and many other forms of “alternative investments.” By covering these assets in an insurance structure, PPLI has the power to convert highly inefficient taxable assets into tax-efficient investments, especially over longer time horizons.

Life insurance offers significant tax advantages, Elliott explains, starting with the fact that investments grow and compound income-tax-free, so long as an underlying policy remains in force. Although withdrawals or surrenders can generate ordinary income if structured improperly, there are ways clients can tap a policy’s cash value tax-free, namely by taking withdrawals up to the amount of their investment in the contract or by taking low-cost loans from the policy.

Ultimately, if a client holds a policy for life and the investments perform well, they will accumulate significant cash value without paying tax along the way. This cash value can provide the policy holder with a variety of benefits, including tax-free withdrawals, enhanced death benefits or funding for children’s education.

Other opportunities when one holds the policy for life include the potential to transfer the death benefit to heirs income tax free, and by placing a policy in a properly structured irrevocable life insurance trust, it is possible to avoid estate taxes as well.

The 5 Big PPLI Misconceptions

In Elliot’s experience, there are five common misconceptions about PPLI that hold back its use.

The first is that, once assets are put into a PPLI structure, they are “hard to use.”

“This comes from the fact that it can be hard to access or use money contained within traditional insurance products,” Elliott explains. “Remember, traditional insurance is the most common, and often only, exposure to life insurance most people have.”

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The fact is that PPLI operates differently.

“In reality, using the money in PPLI is easy,” Elliott says. “The owner has immediate access to 90% of the liquid positions within the PPLI account within a few days’ notice, through policy withdrawals and loans.”

The next big misconception is that money in a PPLI placement should be considered “last resort money,” but as noted, such assets are generally much more liquid than money tied up in traditional life insurance. As Elliott notes, there is actually good reason to argue the opposite is true, and that PPLI funds can be a good source of liquidity should other funding sources run dry.