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“[I]n this world, nothing is certain except death and taxes.”
- Benjamin Franklin
While no one can dispute Franklin’s aphorism about death and taxes, private placement life insurance (PPLI) can reduce the hardship they create for heirs. Although the Senate Finance has recently scrutinized PPLI policies – meaning that one must take the risk-reward calculus of using them into account – as presently constituted, they serve as a valuable tool for transferring wealth efficiently and reducing the financial burden on future generations.
What is PPLI?
Private placement life insurance instruments fall under the life insurance provisions of the Internal Revenue Code (IRC), which provide protection of death benefits and the potential for investment growth. PPLI policies differ from conventional insurance in two main ways: (1) who may utilize them and (2) the types of investments available. PPLI policies require a minimum premium of $1 to $2 million, excluding fees and other administrative costs, and must only be issued to individuals who qualify under federal securities law as both accredited investors and qualified purchasers. Under the Securities Act of 1933, Rule 501(a)(5-6), an accredited investor is someone with individual income in excess of $200,000 ($300,000 jointly) in each of two recent years or with a net worth of over $1 million (excluding their primary residence). Under Section 2[80a-2](a)(51) of the Investment Company Act of 1940, a qualified purchaser is an individual (or company/trust) that owns at least $5 million in investments. Investments in PPLI offer more variety than traditional life insurance, ranging from hedge funds to private credit to real estate and more, and may be highly customized for investment flexibility.
With PPLI policies, premiums are invested into a wide array of asset classes. These investments then accrue – referred to as “buildup” – tax-free over time inside the policy. Policyholders can borrow from their PPLI accounts through loans, providing them with liquidity. At death, premiums and buildup are passed to the policyholder’s heirs. PPLI policies include both on- and offshore markets.
Does PPLI Generate Tax Benefits?
PPLI combines the tax benefits of life insurance and annuities. Life insurance can provide unique tax benefits encompassing opportunities in estate, gift, income and retirement planning that span life and death. The IRC excludes death benefits paid pursuant to a life insurance policy from taxation under Section 101(a)(1). Life insurance premiums may then be invested on a tax-free basis under Section 72(e)(5). Taxes need only be paid on any earnings of policy assets when the amount of withdrawn earnings exceeds the amounts paid in premiums, which means the income is not taxed during the policy’s term. PPLI offers additional tax benefits, including the potential for tax-free loans and withdrawals, but does not have minimum distribution or age requirements. Finally, unlike qualified plans and retirement accounts, there are no contribution limits on investment amounts.
PPLI policies create an additional level of flexibility with this taxation but also potentially severe adverse tax consequences when policyholders do not comply with the tax code.
Is Everyone a PPLI Fan?
Critics of PPLI claim that it benefits the wealthiest among us by taking advantage of certain life insurance provisions that allow for liquidity without triggering tax. In December 2024, Ron Wyden, then-chairman of the Senate Finance Committee, introduced the Protecting Proper Life Insurance from Abuse Act after reporting on an 18-month investigation into these tax-planning strategies to eliminate the tax deferral and life insurance aspects of PPLI. The act would significantly limit the benefits available to these policy holders. It bifurcates traditional life insurance policies and PPLI policies, classifying PPLI as “Private Placement Contracts” (PPCs) and converting PPLI and private placement annuities into PPCs if they are backed by an insurance company asset account that supports fewer than 25 contracts (aggregating related parties) held by independent investors. With this conversion from life insurance or annuity contracts under the IRC, earnings and losses of the account supporting a PPC would be taxed annually. Accordingly, the internal tax-free buildup protection would be lost, no deductions would be permitted and the death benefit paid under a PPC would be taxed. The act would affect existing and new PPCs and mandate additional reporting, with steep penalties for noncompliance. The act has remained in its proposed state since last December.
IRS Enforcement
PPLI must comply with life insurance provisions under the tax code, as well as state insurance department regulations. As a result of the investigation report and the proposed act, the IRS stands ready to target these types of life insurance policies. Typically, they are enforced under the investor control doctrine that limits control over investments by policyowners to prevent risk of elimination of tax-free treatment. Webber v. Commissioner, 144 T.C. No. 17 (2015). However, the investigation report noted that the IRS faces challenges in enforcing investor control rules because there is no requirement to report ownership of a PPLI on a tax return. PPLI inquiries may surface through an audit and/or a foreign bank account report if the PPLI involves an offshore account.
PPLI policies must also meet insurance and diversification requirements. If structured correctly, the IRC, as well as the regulations, permit these types of insurance products to help ensure financial stability after the death of a provider.
What’s Next for PPLI?
The study by the Senate Finance Committee found that PPLI only accounts for a small percentage of individual life insurance policies in the United States. While scrutiny seemed certain, the act targeting this type of insurance policy remains stagnant. The opportunity for plans to use PPLI as effective tax planning vehicles may now be revitalized given that the curbs on the favorable tax treatment such policies provide were excluded from the recently passed One Big Beautiful Bill Act. Nonetheless, due to the inherent risk that the considerable tax benefits of these plans may still be scrutinized – and further, that they rely on a complex set of rules that may be difficult to understand and follow – current and prospective PPLI policyholders should consult with qualified tax professionals to ensure they strictly adhere to SEC and IRC provisions.
Kristen Lowther is a senior counsel at Chamberlain Hrdlicka who focuses her practice on tax controversy and tax planning.
Reprinted with permission from the July 24, 2025 edition of Daily Report © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.