OFFSHORE PRIVATE PLACEMENT LIFE INSURANCE (PPLI)
Frequently Asked Questions (FAQs)

1. What Is Private Placement Life Insurance (PPLI)?

PPLI is a life insurance product designed for high net worth investors. By virtue of the powerful lobbying influence of the life insurance industry, insurance has had a long history as a tax-advantaged investment vehicle. Insurance carriers both inside and outside the U.S. offer customized PPLI policies that are fully compliant with U.S. tax rules and are therefore fully entitled to the preferential tax treatment enjoyed by life insurance. A U.S. tax compliant life insurance policy represents a conservative and cost effective investment vehicle.

Offshore PPLI offers investors the ability to utilize their own trusted asset manager. Domestic insurance does not. This is attractive to high net worth clients. Their motivation for investing in offshore PPLI differs from the reasons for purchasing retail or domestic life insurance. Offshore PPLI is an investment vehicle whose main goals are income, capital gains, and estate tax savings along with asset protection, while maximizing investment choices and incurring as little insurance cost as possible.

Offshore PPLI investment vehicles provide income and estate tax efficiencies completely within the parameters of U.S. tax law. The tax advantages of life insurance are the same whether the policy is acquired onshore or offshore. Earnings on policy cash values, including dividends, interest, and capital gains, are not taxable to the policy owner. They accumulate tax-free within the policy. In addition, withdrawals and policy loans can be used to access policy assets. Sophisticated offshore PPLI techniques maximize your ability to build, transfer, and preserve wealth for generations.

2. Why Are Investors Interested in Offshore PPLI?

The core motivation for acquiring offshore PPLI is to establish a tax-free investment environment, at the lowest possible cost, in which an investor may influence the designation of a money manager to manage the policy assets. Insurance is considered a secondary benefit.

3. Who Purchases Offshore PPLI?

High net worth individuals ($1 million minimum) who want to internationalize their holdings and protect them from creditor risk. Offshore PPLI is an excellent asset preservation vehicle, particularly when combined with dynastic and asset protective insurance trusts.

Offshore PPLIs achieve the goals of income, estate, gift, and generation-skipping transfer tax planning along with wealth preservation. Cayman, in particular,  offers legislation that includes a pro-debtor regime, as well as greater confidentiality and financial privacy. Similar laws in the U.S. do not compare.

4. What is an Insurance “Wrapper?”

An insurance wrapper is an insurance policy used to “wrap” around policy investments. Clients are not interested in buying insurance! They are buying the minimum insurance needed to “wrap” around their investments and make them U.S. and state income tax and estate tax exempt.

5. Why Buy Offshore PPLI? Why Not Stay Domestic?

• International Investments and Currencies. Offshore PPLI is a gateway to access international investments. Many of these investments are not available to U.S. persons, because most foreign securities are not registered with the SEC. If an offshore PPLI buys the securities, a non-U.S. entity is the purchaser. Getting out of the dollar and into foreign equities and strong foreign currencies is another reason. Many international markets show greater returns than U.S. markets, even when domestic markets are performing well.

• Lower Buy-In. Another key reason for buying from offshore carriers which are reinsured by major U.S. reinsurers, is that their investment minimum is $1m not the $40 million required by domestic insurers.
• Use Your Investment Advisor. Clients generally have existing investment managers that manage their portfolios. Domestic companies do not allow a client’s manager to manage and will do so only with large deposits—typically $40 million. This is due to reporting and due diligence requirements imposed by state insurance regulators and state imposed liquidity requirements (typically 30 days) that the investment manager cannot accommodate (e.g., hedge funds often have quarterly liquidity dates), or because state insurance regulators frown on the type of investment or investment style (e.g., use of short-selling or leverage). Offshore carriers can allow investors to use managers they wish, without having to obtain an insurance regulator’s approval.

6. Benefits of Offshore PPLI

• Asset Protection. Many international jurisdictions provide statutory asset protection for the death benefit and investments held by an insurance policy. And, as a practical matter, it is much more expensive for a creditor to bring a claim before a foreign court than a domestic court.
• Access to Global Investments, international asset managers and international funds that are generally not accessible to US investors.
• Increased Privacy. Domestic assets, including life insurance policies, can easily be discovered by private investigators with access to "asset tracking" services in the US. Assets held internationally cannot easily be identified in a routine asset search. The confidentiality statutes of some international jurisdictions are an additional barrier against frivolous lawsuit claims and investigations.
• Currency diversification. Offshore life insurance policies are free to make investments in non-US dollar assets that may gain in the event of future declines in the value of the US dollar.

7. Why Is Planning and Investing Utilizing Offshore PPLI Beneficial?

When investments that are not income tax-efficient (such as hedge funds) are held inside a PPLI, the tax advantages of the insurance enhance the performance of the underlying investments. Clients analyze the policy’s cost versus the rate of return provided by the tax-free build-up inside an offshore PPLI (coupled with the estate tax savings of owning the policy inside an insurance trust).

Offshore PPLI is used primarily as an investment vehicle to enhance the rate of return of investments. By maintaining investments inside an offshore PPLI, they become tax efficient. Offshore PPLI allows policy owners to utilize their trusted Investment Advisor.

8. Why Is Offshore PPLI the Ultimate Asset Protection Tool?

a.   Offshore PPLI Is Asset Protected. Separate, segregated accounts established for each policy are not subject to the claims of your or the insurance company’s creditors or claims against any other policyholder.
b.   Doubly Protected Against Your Creditors. Your U.S. insurance trust is asset protected from your creditors. And into that trust goes a Cayman protected policy.
c.   Insurance Can Negate Fraudulent Transfer Attacks. As the purchase of a policy is an equal value for value exchange; it would be difficult to prove the transaction was fraudulent. With an offshore trust, the settler receives nothing in return, and proving that a fraudulent transfer took place is, therefore, easier.
d.   Business Purpose. Was a transfer made solely to evade creditors, or was there a business purpose? The business purpose for purchasing insurance is well-recognized and respected—family protection and estate planning. There normally is no business purpose in setting up an offshore trust.

9. What Would An Offshore PPLI Structure Look Like?

Assume you wanted to eliminate tax on your stocks and bonds. You would first acquire an offshore PPLI policy and then transfer your investments into the policy in exchange for the policy’s installment sale. Subsequent growth and income on your investments are not subject to taxation. Upon your death, the policy pays your beneficiaries it’s cash value and cancels the remaining note obligation, all tax free.

10. How Much Need an Investor Commit to Offshore PPLI Policy’s?

For optimal cost efficiency, the total investment commitment should be at least $1 million.

11. What Are the Fees Typically Associated with Offshore PPLI?

The fees will vary but are typically 1.0 to 2% of assets under management.

12. Where Is the Investment Account of an Offshore PPLI Located? Is it Safe?

The separate accounts of the policy will be held in accordance with the asset manager that you selected’s normal arrangements.

13. Have Legal Opinions Been Issued?

The offshore insurers we use all have tax opinions explaining the legal and tax concepts of life insurance and are available to policy purchasers.

14. Is It Legal?

Yes. Offshore PPLI is based on concepts of insurance and tax laws that have been around for decades, and are not new. We have thoroughly researched and analyzed the legal and tax issues involved.

15. Do We Need to Use a U.S. Tax Compliant Offshore PPLI?

Yes! A life insurance policy complying with all the U.S. tax laws is an essential component of this planning.

16. Has Offshore PPLI Been Tested?

The key components of Offshore PPLI (i.e., the use of an ILIT to own the policy and the tax principles of life insurance) have been court tested. Numerous Internal Revenue Code sections are applicable, and many rulings and regulations have been issued interpreting these Code sections, all resulting in straightforward rules and guidelines.

Additionally, the installment note or self-cancelling installment note sometimes received in exchange for assets transferred into the policy has been court tested. It is definitely allowed provided it is arms-length. The note must be equal to the fair market value of the assets transferred, and the interest rates must be at least equal to the IRS published minimums.

17. Will Congress Change the Insurance Tax Rules?

The insurance industry has a powerful lobby that would guard against changes to the tax concepts involving life insurance.

18. Do You Have Access to Policy Funds?

Policies allow for policy withdrawals and policy loans.

19. Can an Offshore PPLI Policy Help With Your Estate Planning?

Through proper structuring, Offshore PPLI can be used as part of a family’s estate planning, combining income, estate, gift, and generation-skipping transfer tax benefits.

20. Does Offshore PPLI Provide Privacy and Confidentiality?

Many offshore jurisdictions stipulate that insurance policies must be held in strict confidence. Offshore PPLI provides a high degree of privacy and confidentiality.

21. Can Offshore PPLI Provide Flexible Investment Opportunities?

The type of investments that can be held in the policy account is unlimited. A manager, recommended by the client, may make investment decisions.

22. Are Offshore Laws Favorable to Offshore PPLI?

A number of offshore jurisdictions have enacted insurance law, which provides flexibility and protection. The Cayman Islands’ confidentiality laws provide a barrier to frivolous claims

23. Can a Potential Policyholder Purchase Offshore PLI in Kind or Only for Cash?

Domestic life insurance carriers require premium to be paid in cash. Many offshore PPLI carriers allow premium to be paid “in kind.”

24. What Happens If The Policy Fails to Meet the IRS Definition of a Life Insurance Contract?

If a policy fails to meet the definition of a life insurance contract, it will be taxed as income of the insured, as it is earned. Further, the income on the policy for all prior taxable years will be treated as received during the taxable year in which the insurance contract ceases to meet the IRS definition of a life insurance.

25. Will the Death Proceeds Pass to the Taxpayer’s Beneficiaries Free of Income Tax?

Death proceeds pass to the taxpayer’s beneficiaries free of income tax. Further, if the policy is owned by an insurance trust, the policy will be free of estate tax.

26. Can an Independent Advisor Be Appointed to Manage the Assets in the Offshore PPLI?

Your chosen Investment Advisors is permitted provided he is appointed and controlled by the insurance company. IRC §817(h)(5).

27. Will the Offshore PPLI Be Subject to U.S. Excise Tax?

Offshore PPLI is subject to a 1% excise tax unless exempt by treaty.

28. Can a PPLI Policy Acquire the Insured’s Assets for an Installment Note?

An offshore PPLI policy can acquire assets from the insured. The terms of the payment can include an installment note or a SCIN.

29. What Is the Difference Between How Offshore PPLI Policies and Domestic Policies Are Funded?

With domestic policies, the objective is to purchase the maximum death benefit for the least cost. The funding of Offshore PPLI is the opposite. The objective is to deposit as much cash into the policy while maintaining the minimum insurance required by the Internal Revenue.

30. Is My Money Safe? What About the Death Benefit?

Cayman carriers reinsure almost all of their risk with major reinsurers. By doing so, an offshore life insurance company’s de facto liability for a policy it issues is only a small fraction of the face amount.

Offshore Banking and Offshore Investing

Using Private Placement Life Insurance Offshore

Frequently Asked Questions