What is PPLI?
Private Placement Life Insurance, PPLI, is an investment-linked insurance structure that has been utilised in the USA, UK and Europe for a number of decades.
Insurance, to most of us, is a standard risk mitigation tool, providing protection over Critical Illness, Permanent Disability and Death. Although PPLI has an element of life insurance to be classed as an insurance product, it has primarily been used for tax and estate planning. PPLI is an open-architecture insurance policy, allowing for flexible Private Placement investment of cash, equities, funds as well as illiquid asset classes such as property, art and private equity. As an insurance contract, it also offers policy owners with greater degrees of privacy when compared to un-wrapped investment solutions.
How does PPLI work?
Insurance structures can be utilised to hold assets and benefit from disassociation of ownership. This means that the insurance company owns the underlying assets whilst the policyholder owns the PPLI. The value of the PPLI is directly correlated to the value of the underlying assets held in the structure.
The process is relatively straightforward:
1. Client determines; policy ownership, lives assured and beneficial ownership of the policy.
2. Client transfers assets to the insurer. Either as cash to be invested or by way of in-specie transfer of existing assets.
3. Insurer issues the PPLI policy terms based on the premium value received in Step 2.
4. Client now owns an insurance contract, increases privacy and often benefits from wealth succession and tax deferral.
Once the policy is established, the owner is able to appoint a qualified investment professional to manage the underlying investments on their behalf. In many cases, the client’s existing investment platform can be used within the PPLI contract.
What are the Advantages of PPLI?
There are three primary benefits to utilising a PPLI structure:
• Tax Deferral and Tax Mitigation.
• Wealth and Succession Planning.
• Privacy and Control.
- Tax Deferral/Mitigation
PPLI offers several advantages in terms of tax reporting, tax deferral, and tax on growth such as capital gains, dividends, and income. These policies are recognized globally and can benefit from double tax treaties (DTAs). Similarly, life insurance policies have special tax treatment for underlying assets held, typically tax-exempt or taxable at discounted rates, allowing for tax-efficient operation and growth. In addition, the ability to mitigate estate taxes on assets held can prove valuable for many clients.
2. Wealth and Succession Planning
Insurance contracts can generally include a nomination of beneficiaries, allowing the policy owner to have greater control on the distribution of wealth on death. This allows not only for the avoidance of probate (typically a 6-18 month process for beneficiaries to receive estate proceeds) but also allows, in some circumstances, to remove the impact of forced heirship legislation.
The ability for Trust companies to take on PPLI contracts as the Trust property enables for cost-effective and streamlined succession planning.
3. Privacy and Control
Through disassociation of ownership, the underlying assets are no longer directly linked to the policy owner. This significantly reduces the level of data being sent around the world through CRS. The policy owner also has the control to either manage the underlying investments themselves, or to choose a professional to manage on their behalf. They can change permissions for investment control as and when required. Where a corporate structure is used as premium in kind, the insurer can delegate voting rights back to the client.
Summary
PPLI is an undervalued wealth planning tool that could provide you with many of the benefits detailed above. By investing wealth through a PPLI structure, you can have greater control over the privacy and distribution of wealth in the event of death, whilst benefitting from tax optimisation during your life.
Reach out if you would like to discuss your options in more detail.