Tax-Avoidance On Steroids—Private Placement Life Insurance

Good to Know

CFP Board expects a certificant to serve a spectrum of client demographics based upon factors such as age, gender, culture, and net worth.  This blog summarizes a unique income tax strategy for high and ultra-high net worth clients.  Private Placement Life Insurance (PPLI) can help a client:

  • Avoid income tax on investment income and gains,
  • Access liquidity on an income-tax-free basis, and
  • Provide an income-tax-free death benefit to heirs.

PPLI can check each of the preceding boxes for qualified clients. We’ll unpack how these benefits are possible by summarizing the:

  • Basics of PPLI,
  • Ideal client,
  • Qualified client,
  • Income tax deferral/avoidance strategy, and
  • Way to avoid a common tax trap.

We begin with the basics.

Basics of Private Placement Life Insurance

PPLI is an institutionally priced permanent life insurance policy, frequently structured as variable universal life, that can be used to eliminate income taxes on investments, including alternative investments such as hedge funds.  The policy is purposefully “overfunded” for investment purposes.

Let’s break that definition down into bite-sized pieces.

  • Institutionally priced—unlike retail policies purchased through an agent, PPLI can generally be purchased directly from the life insurance company. As a result, there are either no agent commissions or reduced commissions. Consequently, administrative costs can be lower than retail policies.
  • Variable Universal Life (VUL)—this policy type offers a relatively wide range of investment strategies to promote diversification while allowing the policy owner’s premium payments to vary significantly.
  • Alternative Investments—retail VUL policies generally do not allow investments into hedge funds or other alternative investments. In contrast, PPLI may be structured to include alternative investments as an investment choice.
  • Overfunded—The IRS limits the amount of premiums that can be paid into a permanent life insurance policy, such as VUL. Generally, the higher the death benefit, the more premiums may be paid into the policy.  The PPLI strategy involves taking out a large death benefit (think $10,000,000 to $100,000,000) to allow annual premiums of up to millions of dollars.

The next logical question is, “what kind of client may be attracted to PPLI?”

Ideal Client Profile

The ideal client:

  • Is invested in highly tax-inefficient investments such as hedge funds,
  • Pays income taxes at the highest marginal tax rate,
  • Has sufficient assets to invest $1,000,000 annually (or more) into PPLI for at least three to four years, and
  • Is a “qualified client.”

Qualified Client

Private Placement Life Insurance holds out the promise of almost unprecedented income tax deferral or avoidance but is a complex strategy restricted to sophisticated, presumably savvy investors (qualified clients).  A “natural person” (living human) is a qualified client only if they are an “accredited investor” and a “qualified purchaser.”

Accredited Investor—A natural person is an accredited investor if they have:

  • An individual (or joint-with-spouse) net worth, excluding their primary residence, of $1,000,000 or more and
  • An annual income of $200,000 or more ($300,000 or more if married) in each of the two most recent years with the reasonable expectation of earning the same amount or more in the current year.

Qualified Purchaser—A natural person is a qualified purchaser if they individually or jointly with spouse own $5,000,000 or more in investments.

Income Tax Deferral/Avoidance

Would your high net worth client pay 5% (or less) in insurance policy fees to avoid combined federal and state income taxes of up to 50%?  Here’s how income taxes can be avoided in a properly structured policy:

  • Tax-deferred income and gains from policy investments are added to the policy’s cash value,1
  • The net premiums2 paid can generally be withdrawn from the cash value on an income tax-free basis, and
  • Tax-deferred income and gains can generally be taken out of the cash value as tax-free loans that do not have to be repaid during the client’s lifetime.3

Key point—PPLI is a highly tax-efficient life insurance “wrapper” around highly tax-inefficient investments such as hedge funds.   

Avoid a Common Tax Trap

If you suspect this is too good to be true, you will not be surprised to know there’s a potential trap for the unwary.  First, we’ll describe the trap, and then we’ll reveal the escape hatch.

The Trap

You cannot put too much cash (premium payments) into a permanent life insurance policy (e.g., VUL) during the policy’s first seven years.4  Premiums are limited by the amount of the death benefit and other factors. A modified endowment contract (MEC) is a life insurance policy that has exceeded these premium limits.

Here’s the consequence of creating a MEC—tax deferral is lost.  Distributions or loans taken from the cash value are taxed immediately to the extent of the tax-deferred income or gains.5  This restriction is intended to prevent policy owners from using life insurance primarily as a tax-deferred investment strategy.

The Escape Hatch

The escape hatch is straightforward; the death benefit is increased during the policy’s early years to permit annual premiums of $1,000,000 or more.  Hence, a properly structured PPLI will not create a MEC.  After a period of years, the policy premium restrictions no longer apply, and the death benefit can generally be reduced without jeopardizing the tax benefits.


Private Placement Life Insurance can be a powerful tax avoidance strategy for high net worth clients.  However, the scope of this summary blog cannot cover the complexities of implementing this strategy.  Consultation with an experienced life insurance professional, CPA, CFP® certificant, attorney, and tax professional is strongly recommended.


The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide tax, legal, compliance or financial advice. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

1 Life insurance occupies a unique position in the Internal Revenue Code. Increases in the cash value from income and gains are income tax-deferred.
2 Net premiums are total premiums paid less any policy dividends received.
3 Generally, the loans can be paid off at the client’s death by the policy’s death benefit.
4 Other restrictions and exceptions may apply.
5 A 10% penalty may also be assessed for distributions or loans taken before age 59½.