Why PPLI?

If you’re part of the HNW (high net worth) or UHNW (uber-high net worth) set, you will have come across PPLI, or Private Placement Life Insurance; even if you have not utilised its benefits. There are some that call it a tax scam, i.e. a way of avoiding paying too much tax on investments. In a way, they’d be right; PPLI does provide potential tax benefits but that isn’t the only reason to take out a PPLI policy.

What is PPLI?

Firstly, let’s just clarify what a PPLI is; in its basic form, it is an investment-linked insurance policy that protects the wealth and estates of HNW investors. This enables them to pass it on to future generations, without having to pay too much in tax - depending on their nationality and where they live.

Like most life insurance policies, a proportion of the monthly premium is invested on behalf of the policyholder and their beneficiaries. In general, that money is invested in stocks, shares and bonds. Whilst the same happens with a PPLI policy’s premium, the difference is that the investment is made in much more diversified types of funds, like hedge funds, as well as more tangible assets, such as real estate or art, which helps HNW investors broaden their investment portfolio. The policyholder holds the account but the funds are invested in agreement with an investment strategy and the associated risk level. The client does not have a say as to where and how those funds are invested.

So, why don’t other wealthy people take out PPLI policies? Good question. It’s because there are certain criteria that have to be met in order to take out a PPLI policy. It must be noted that the HNW and UHNW make huge investments into hedge funds and other alternative investments. PPLI helps to shield them from paying exorbitant taxes and ensuring their beneficiaries don’t meet the same fate.

PPLI qualifying criteria

PPLIs can’t be bought ‘off-the-shelf’ in the same way as a standard life insurance policy. Life insurance companies and their agents are only able to offer PPLIs to investors that have assets valued in the millions – for example, in the UK it is more than ￡10 million – and in the USA, they must have at least ￡1 million in liquid financial assets, i.e. cash.

Other criteria include:

• The resources to pay for annual premiums that are over $1million for a minimum of three years.
• They want to invest in a hedge fund or other alternative investment.
• Their portfolio includes other highly tax-efficient investments.
• They want to protect their assets from creditors.

How does a PPLI policy work?

Generally, PPLI policies are structured in a way that maximises the value of the asset, as well as accumulated value, yet keeps the cost of the insurance lower. However, it is only really affordable for HNW and UHNW investors.

Being a variable life insurance policy:

• The insurance premiums are flexible in that policyholders can make higher payments and can be paid monthly or annually. However, the premium must be of a sufficient amount to cover the insurance cost.
• The insurance premium is deducted from the cash value of the asset listed in the policy.
• Should any asset fall to the value of zero, the policy is lapsed.

Benefits of PPLI

As well as being able to access the accumulated value of assets which can then be used for other purposes, the main reason for getting a PPLI policy is for the tax advantages.?

Tax benefits - beneficiaries are free from tax on assets and the tax on accumulated cash value is deferred, therefore higher net returns are possible. This also means that tax reporting is far simpler. In addition, a PPLI policy can eliminate the stamp duty and turnover tax applied by Swiss banks as foreign insurers are exempt.

Any dividend on the accumulated values is tax free in that the withholding tax can be reclaimed, but only if the insurer is in a country that has double tax treaties.?

In the USA, investments made through a life insurance policy are not considered situs assets, and therefore, are not subject to the country’s 40% estate tax.

Privacy - because the insurance company owns the policy, there is a much greater degree of privacy for the policyholder.

Asset protection – as the underlying assets are held as part of the policy, which is owned by the insurance company, it protects the assets from creditors. Therefore, should the insurer get into financial difficulty, or go bankrupt, those underlying assets are fully protected.

Arbiter agreement – policyholders are able to appoint an Arbiter to the policy and specify the powers, and rights, they have with regards to the underlying assets. For example, the Arbiter may be given the right to change the agreed investment strategy. It is up to the policyholder what the Arbiter can and can’t do, and they have the power to revoke these rights at any time.

Estate planning – for any HNWI or UHNWI, estate planning is crucial and taking out a PPLI policy has a beneficial strategy. The policyholder can elect beneficiaries, as well as appointing an Arbiter. When the insured person dies, the executors do not need to go through the probate process and the insurance policy pays out to the beneficiaries within 30 days. This allows the beneficiaries to access the funds and necessary cash to finalise the estate process.?

Investments made by the insurance company for a PPLI policy are often varied. Whilst they may invest in stocks and shares, they will also invest in hedge funds, securities and other tangible investments. With a PPLI policy being of equal value to the underlying investments and with the majority of countries allowing assets within a structured PPLI policy to grow tax preferred, it is a powerful option for HNWI and UHNWI when it comes to effective estate planning.

International Wealth Solution Ltd (IWSL) are professional experts in providing high net worth wealth solutions. If you have a client looking for estate planning and has a combination of properties across multiple countries, our team is here to help you with sound advice and comprehensive solutions. Contact us at?[email protected]?for further advice.