Have Your Cake and Eat It Too?

By Richard Todd

For certain investors, creating an insurance wrapper around some assets or a portfolio can create large tax advantages (Innovest does not sell or deal insurance and would refer you to a professional if appropriate). Private Placement Life Insurance (PPLI) is increasingly used to enhance after-tax returns for a suitable investor profile. While these products can, at times, be oversold, we are firm believers that PPLI is an ideal strategy to create a tax-free umbrella on long term assets in the appropriate circumstances.

What are the asset characteristics of an investor that should be considering PPLI?

• An expectation that the assets will primarily go to heirs or charity;

• Asset returns are primarily taxable - private debt or hedge funds are examples of investments that are ideal in a PPLI wrapper; and/or

• Assets held in a grantor trust, where compounding and distributions can occur tax-free.

Depending on the investment size, fees range from 0.40% to 1%. At the highest federal tax rate of 37%, plus state rates on top of that, high returning assets are most appropriate.

Taxable Investment

Return After Investment Management Fees: 7.0%

Federal Tax Rates: 40.80% (2.85)

State Tax Rate: 4.9% (.34)

Net Rate After Tax Return: 3.81%

Private Placement Life Insurance

Return After Investment Management Fees: 7.0%

Federal Tax Rates: 0%

State Tax Rate: 0%

Average PPLI Fees and Expenses: 0.70%

Net After Fees and Expenses: 6.30%

There are some complications to PPLI, including insurance underwriting. While insurance is typically designed to maximize a death benefit, PPLI is designed to create the lowest cost possible. Most investors are insurable, but at times it is prudent to insure another family member.

If you would like to understand more about PPLI and how it might apply to your circumstances, we would be happy to discuss and refer you to an insurance expert.