No one loves capital gains taxes (well, maybe other than the IRS). That's why finding ways to legally take advantage of tax shelters to reduce your tax burden can be a critical tool in preserving and building wealth. It's also why private placement life insurance (PPLI) has been gaining popularity among the wealthiest 10% of Americans who are seeking out tax shelters beyond traditional annuities, IRAs, or other retirement accounts.
Accredited investors can purchase a private placement life insurance policy to gain tax shelter for their investments in real estate, businesses, securities, and more. But it does come with some caveats. Read on to find out if this investment vehicle is a good fit for your funds.
What is private placement life insurance?
PPLI is a type of insurance policy that is very similar to a universal life insurance policy. It allows the policyholder to invest in securities or other alternative investments, like real estate, under the shelter of tax deferment. The policyholder pays a premium for their policy, which is then able to be drawn upon for self-directed investments as a loan to yourself, with the policy as the collateral.
PPLI is the next level of the infinite banking concept, taking it one step further into the realm of the ultrawealthy. Ultimately, the cash value of the policy is tax-deferred; the dividends, if applicable, are tax-free; and in the event of a death benefit payout, it is completely tax-free.
Who is private placement life insurance good for?
PPLI is a type of life insurance policy that is only available to accredited investors, as it is an unregistered securities product. The Securities and Exchange Commission (SEC) defines an accredited investor as an individual who has a net worth of at least $1 million (excluding primary residence) or an income of $200,000 ($300,000 for married couples) for the past two years.
That means that unless you are in the highest tax bracket and are specifically seeking tax shelter at an expense, this policy is not right for you. Most policies will require the individual or trust to pay an annual premium of $1 million or more (between $3 million and $5 million is typical) into the PPLI.
Can you invest in real estate with a PPLI?
A PPLI allows you to invest in any speculation you see fit, since you are deemed knowledgeable enough to do so as an accredited investor. That means in addition to hedge funds, venture capital, and other short-term capital gains financings, you can directly invest the funds in real estate investment trusts (REITs) and even real estate itself.
There are some overarching rules that must be met though. You must follow insurance standards by purchasing insurance-directed funds. As the investor and policyholder, you are also unable to influence the decisions of the fund managers. If you do, you will be disqualified from its tax advantages and can potentially even lose the policy.
You must also follow diversification guidelines with five or more distinct investments with your portfolio, or you will again be disqualified from the tax shelter, according to IRS regulations. Aside from that, you will be able to utilize the funds for a wide array of real estate-related holdings -- everything from single-family to commercial properties.
The Millionacres bottom line
This form of investing does come with significant fees and premium commitments, but for those with a large tax burden, the tax incentives often outweigh the fees. Make sure to speak with your tax professional and several insurance brokers so that you can gain a solid understanding of the various offerings and how it can assist you in your overall tax strategy. While not a good fit for the majority of the population, it absolutely fills a much needed niche for many accredited investors.