PRIVATE PLACEMENT LIFE INSURANCE
WHAT IT IS AND IS NOT
The terms "Private Placement Life Insurance" or "Private Placement Annuity", both referred to here as "PPLI", refer to policies designed to accomplish specific purposes for the policy owner. PPLI is usually issued by foreign insurance companies not doing business directly in the U.S., simply because foreign Carriers have much more flexibility to design policies for specific purposes.
There are typically no commissions paid in connection with these policies, and, depending on the owner's purposes, the cost of the policy death benefit can be minimized and policy cash values maximized. Premiums may be paid in a single lump sum or in annual amounts, with no set schedule.
PPLI, which can provide a very minimal death benefit, is typically NOT a substitute for term or whole life insurance policies with large death benefits issued by U.S. insurance companies, and such policies is an important planning tool for estate and wealth planning. There are many kinds of policies issued by U.S. Carriers to accomplish estate and wealth planning objectives and many of the larger U.S. insurance companies have offshore subsidiaries.
As a rule, no commissions are paid on the acquisition of a PPLI issued by a foreign carrier. The Company may charge a fixed one-time initial fee plus an annual maintenance charge (usually 1% or less). An additional cost is a 1% federal excise tax on life insurance premiums paid to a foreign insurance carrier; however the Company, or a subsidiary may elect to be taxed as a U.S. insurance company ( a 953(d) election) , which, among other advantages, avoids the imposition of the 1% excise tax. Policy investment in U.S. securities, for example, will not then be subject to any tax withholding.
U.S. COMPLIANCE and INCOME TAX-DEFERRAL
For U.S. taxpayers (Citizens, Green Card Holders, and persons here for the requisite time period), the PPLI must be U.S. compliant (IRC7702) to generally allow for tax-deferred earnings. A discussion of U.S. compliance is beyond the scope of this letter. If and when the policy is terminated (prior to paying the death benefit) the U.S. tax payer is obligated to pay tax on untaxed earnings. Otherwise, life insurance death benefits, which include all cash values, are paid income tax free, and if the policy is owned by, for example, an irrevocable life insurance trust, the insurance proceeds are not subject to estate tax.
Private Placement Life Insurance Policies can be specially written and issued to accomplish any number of purposes, and following are just examples:
- ASSET PROTECTION: cash and securities can be paid as a premium, and the policy can be written to effectively deter judgment creditors. In addition, the Company may not be subject to U.S. jurisdiction. The transfer of assets as paid-in premiums is arguably a "transfer for value" and should not be deemed a fraudulent conveyance; facts are of course an important consideration. For asset protection purposes, cancellation rights and access to cash values may be delayed or limited.
- TAX DEFERRED INCOME: The U.S. compliant PPLI can earn tax deferred income from world-wide investment opportunities; investments are not limited to any particular category, and diversification is required. Direct "Investor Control" is to be avoided in a U.S. compliant policy. Often an investment advisor is appointed.
- CAPITAL GAINS: The foreign issued PPLI does not pay capital gains tax on profits from non-real estate related investments.
- ANONYMITY: PPLI can provide effective anonymity for asset ownership.
- ESTATE PLANNING -NON-U.S. PERSONS: Non-Citizens, regardless of U.S. residency, are not afforded the unlimited marital deduction or the current large estate tax exemption. PPLI proceeds are not subject to the Qualified Domestic Trust requirements.
- PRE-IMMIGRATION PLANNING: The transfer of assets to a PPLI before immigrating to the U.S. may keep foreign assets and related income out of the U.S. tax system provided the policy is U.S. compliant after the person takes up U.S. residency. This arrangement is of particular interest when the immigrant does not intend to remain permanently in the U.S. The "Exit Tax" on worldwide assets is imposed on "long term" Green Card Holders, and PPLI can be structured to minimize that tax.
- PFIC: Earnings on assets in a foreign issued PPLI are not subject to the issues of passive investment company income (PFIC); this could be important, for example, for hedge fund investments. (Note that the prohibition against "investor control" must be considered; PFIC issues might arise in a 953(d) election).
- CASH VALUE BORROWING: Cash values in a PPLI can be accessed through borrowing. The purchase of a PPLI, and borrowing from it, are not reportable transactions. However, cash values in a foreign life insurance policy or annuity must now be reported on the FBAR form.
- PPLI INSTEAD OF FOREIGN TRUSTS WITH U.S. BENEFICIARIES: Distributable net income must be distributed from a foreign (grantor) Trust to U.S. beneficiaries to avoid negative tax consequences. PPLI does not have the distribution obligation, and income can be accumulated tax free in the policy. The foreign policy owner might, for example, borrow from the policy to make tax free (but maybe reportable) gifts to U.S. persons.
The above list provides only brief examples of applications.
Many States, including California, impose a tax on premiums paid to a foreign Carrier. There are cases which support the argument that States may not impose tax on Carriers not doing business in that State. California has not to date sought to collect this tax. (The applications and contracts, and any physical exam, are completed out of the U.S.) State tax is in any case being the obligation of the insurance company.
A PLANNING TOOL
Private Placement life insurance and annuity policies issued by a foreign insurance company may offer flexibility not otherwise available, to meet the specific objectives of the policy owner. Careful and conservative planning is of course imperative.