To Shield Asset Class Investments from Current Period Taxation
Private placement life insurance (PPLI) and private placement variable annuities (PPVAs) have become increasingly popular as high net worth investors seek greater tax efficiency with investment vehicles. Typically, hedge funds and alternative asset class investments are taxed as ordinary income or short-term capital gains, at federal rates as high as 43.3%. Add in state taxes and the combined rate approaches 50%. By holding these assets within an insurance wrapper, investors can defer and potentially eliminate the tax burden.
Additional Benefits of PPLI/PPVAs
• PPLI typically offers lower costs and commissions in comparison to retail insurance products
• Simplified tax reporting – PPLI eliminates K-1s and many other annual reporting burdens associated with hedge funds
• No surrender charges – These policies can be surrendered at any time without incurring surrender charges that are typically associated with retail life insurance policies
• Avoidance of phantom income – Investors will avoid paying taxes on income that’s not distributed to them because they accumulate in a tax-free environment
• Enhanced creditor protection
The Difference Between PPLI & PPVAs
Private placement life insurance and private placement variable annuities both allow investments to grow tax-free within the insurance wrapper until they are distributed or withdrawn from the policy. Unlike PPVAs, PPLI offers investors the ability to access funds tax free in two ways:
1. Withdrawing up to the investment in the contract
2. Borrowing funds from the policy
Funds that are left within the policy for life will never be subject to income taxes and heirs will receive the funds as an income-tax-free death benefit.
PPLI and PPVA are also available through 1035 (like kind) exchanges from existing life or annuity policies which can allow existing policy owners to lower fees and gain access to greater investment choices. The Schechter Wealth team provides all structuring, reporting and accounting services needed for the management of PPLI Investment Accounts. Our experienced advisors and support teams can help you understand if you can take advantage of the tax benefits of PPLI. This tax strategy, for qualified high net worth individuals, involves properly structuring a life insurance policy to reduce the tax implications on select investment assets.