• Private placement life insurance (PPLI) helps mitigate the tax bite from a variety of different types of investments and makes it possible to capture returns tax-free.
  • Even if the government lowers the tax rate going forward, you still come out ahead using PPLI if you give the tax-free compounding enough time.
  • Play it smart: If PPLI isn’t structured correctly, it will be disallowed by the IRS-and the business owners can face significant penalties.

Want to pay less in taxes? You’ve got plenty of company!

If you’re like the vast majority of your highly successful peers, you see the need to reduce the amount of money you pay to Uncle Sam each year. A full 94.3 percent of successful business owners are interested in ways they can legitimately lower their personal taxes. (see Exhibit 7)

But guess what? The advisors you probably work with to manage your financial life may not be getting the message. As seen in Exhibit 8, not even one-quarter of you are currently working with experts to lower your personal tax bill. That means 76.4 percent of you are not getting professional, proactive tax help!

The upshot: There are sophisticated wealth management strategies and products available that can significantly mitigate the impact of taxes on your personal wealth. The wealth you possess outside of your business. But many of you probably are not hearing about them (or other strategies and products to reduce taxes, for that matter) from your professional advisors.

Enough is enough. It’s time to fix the problem. Here’s a look at private placement life insurance – a particularly effective way some of the Super Rich and the ultra-wealthy who work with family offices reduce the tax impact on a portion of their investments, and a solution that may very well make sense for you.

Private placement life insurance

When seeking to maximize personal wealth as an investor, what you earn can be less important than what you walk away with in your pocket. Investments with great headline returns can quickly look very mediocre once taxes are taken into account.

EXAMPLE: Hedge funds. Depending on factors such as where you live and your income tax bracket, you could easily pay 50 percent or more in taxes on the profits you earn though a hedge fund investment.

Private placement life insurance helps mitigate the tax bite from a variety of different types of investments and makes it possible to eliminate all income and capital gains taxes.

Essentially, private placement life insurance is a variable universal life insurance policy that provides cash-value appreciation based on a segregated investment account and a life insurance benefit. It may be able to provide savings and minimize the death benefit.

Key benefits of PPLI:

  • The investment options can be tailored to your needs as a successful business owner.
  • The cost of insurance per dollar of coverage is greatly reduced.
  • The money in the PPLI grows tax-deferred.
  • The money can be withdrawn without paying capital gains tax, when properly structured.

PPLI can help mitigate taxes in your investment portfolio and can be especially useful as a component of more-complicated tax strategies.

EXAMPLE: If you have a significant windfall that results in a large infusion of ordinary income, private placement life insurance (in conjunction with a charitable trust) can offset the tax while supporting charities such as private foundations. And with proper planning, the cash-value appreciation and insurance coverage can also escape gift and estate taxes.

BONUS: PPLI can also be structured to provide world-class protection from creditors.

We know that the Super rich are strongly gravitating toward private placement life insurance. Why? The effects of tax-free compounding on their investment returns can be astounding, especially if the assets placed in PPLI throw off significant dividends or are in some way tax-inefficient. And because it’s life insurance, it’s extremely versatile in its uses. Some of the Super Rich and ultra-wealthy business owners are capitalizing on private placement life insurance by integrating it into their business strategy (using it to provide deferred compensation and fund corporate benefits) and personal wealth maximization strategy. All told, the possible uses of private placement life insurance are extensive.

NOTE: Even if the government lowers the tax rate going forward, you still come out ahead using PPLI if you give the tax-free compounding enough time. Best bet: use PPLI with money you won’t need to access for at least five years.

CAVEAT: You won’t be able to use any losses in a PPLI policy to offset gains elsewhere in your portfolio and engage in tax-loss harvesting. The losses are not tax-deductible.

Getting the help you need to avoid penalties

The challenge, however, is finding a high-caliber wealth manager who knows how to use PPLI to achieve optimal results.

Consider that fewer than 40 percent of the financial advisors we surveyed (which includes any other professionals who are part of their team) say they are knowledgeable about PPLI (see Exhibit 9). More telling is that fewer than 3 percent of financial advisors have provided a client with a private placement life insurance policy.

This can spell big trouble for business owners who may be considering this approach. PPLI is a complex solution that incorporates investments and insurance. If it isn’t structured correctly, it will not qualify as life insurance-and the business owners can face significant penalties. That’s why it’s vital to work with a professional or team that has PPLI experience.

WARNING: Private placement life insurance policies prohibit investor control. This means that a third party at “arm’s length” must invest the money. This has been known to be a point of confusion for a number of financial advisors and their clients. Consider one investor who was heavily involved in selecting the stocks that the financial advisor was buying and selling inside the investor’s private placement life insurance policy. This resulted in the tax benefits of the policy being invalidated.

The next step

If you would like to explore PPLI further, contact Homer@konvergentwealth.com.

CASE STUDY

A successful 45-year-old business owner has received a $1 million bonus and wants to invest that money as effectively as possible. His goal: to achieve long-term growth of the money while minimizing the tax impact on the earnings.

He first considers making the investment in a taxable account. Assuming the investment earns a 7 percent net annual return and that he pays taxes of 39.6 percent on his earnings each year, his taxable account would be worth $1,513,018 after ten years. After 40 years, it would be worth $5,240,542.

After consultation with his wealth manager, he chooses instead to place his money in private placement life insurance policy. This will allow his investment returns to grow free of taxes while also providing a death benefit.

The results:

  • After ten years, the cash value of his policy would be $1,718,061-13.5 percent more than if he had placed the original $1 million in the investment account.
  • After 40 years, the cash value would $9,559,918, or 82.4 percent more than if he had used the investment account.
  • At the same time, the policy would provide a death benefit of just over $10 million.

Past performance is not indicative of future results. All figures are hypothetical and do not correspond to any actual returns. Your returns will differ. Carefully review all fee and expense disclosures before investing in any private placement life insurance vehicle.


VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
©Copyright 2017 by AES Nation, LLC. All rights reserved.

No part of this publication may be reproduced or retransmitted in any form or by any means, including, but not limited to, electronic, mechanical, photocopying, recording or any information storage retrieval system, without the prior written permission of the publisher. Unauthorized copying may subject violators to criminal penalties as well as liabilities for substantial monetary damages up toe $100,000 per infringement, costs and attorneys’ fees.

This publication should be utilized as a substitute for professional advice in specific situation. If legal, medical, accounting, financial, consulting, coaching or other professional advice is required, the services of the appropriate professional should be sought. Neither the authors nor the publisher may be held liable in any way for any interpretation or use of the information in this publication.

The authors will make recommendations for solutions for you to explore that are not our own. Any recommendation is always based on the authors’ research and experience.

The information contained herein is accurate to the best of the publisher’s and authors’ knowledge: however, the publisher and authors can accept no responsibility for the accuracy or completeness of such information or for loss or damage caused by any use thereof.

Unless otherwise noted, the source for all data cited regarding financial advisors in this report is CEG Worldwide, LLC The source for all data cited regarding business owners and other professionals is AES Nation, LLC.

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