Alternative investments, Taxes Tax-efficiency for alternative investments

Private Placement Life Insurance (PPLI) is a complex type of variable universal life insurance that's available to high-net worth families—generally, families who can afford to set aside millions of dollars in a life insurance policy and achieve their lifetime spending objectives without touching the policy. To purchase a PPLI policy, you must be a Qualified Purchaser and an Accredited Investor.

PPLI policies are highly customizable, and can be structured to allow for different types of investment strategies and asset classes that are generally not available in other forms of life insurance. PPLI policies are most commonly used to help families achieve these three key objectives:

1. Tax advantages: Like other life insurance policies, there is generally no tax on the dividends, interest, and capital gains that are generated by investments within a PPLI. This is especially useful for investments with a high amount of tax drag—such as corporate bonds, hedge funds, and private credit funds—and for strategies with a high level of turnover. In addition to allowing for tax-deferred growth during the lifetime of the insured, the death benefit paid to the policy beneficiaries is also generally income tax-free.

2. Asset protection: In some jurisdictions, the cash value and death benefit of a PPLI will both be protected from potential legal claims and the policyholder's personal creditors.

3. Estate planning benefits: As with other life insurance policies, the PPLI policy's death benefit can be used to help provide liquidity and cover estate taxes and other expenses. In the context of a broader estate and succession planning strategy, this liquidity can help to preserve and transfer wealth to the intended beneficiaries. Be sure to work with a trust and estate planning expert to appropriately structure the trust and insurance to suit your objectives. For example, if placed within an irrevocable trust (which must also qualify as an Accredited Investor), allocating to a PPLI can allow you t o use up a portion of your lifetime gift and estate tax exemption today, and allow the assets' future growth to occur outside your taxable estate.

Are private placement strategies appropriate for you?

Although lifetime withdrawals from a PPLI may be permitted, and you can take out a loan (up to ~85% of the basis, generally) with no tax consequences if you repay it, these policies often have restrictions on withdrawals that could result in adverse tax consequences (particularly if the policy is considered a Modified Endowment Contract). We generally recommend that investors fund PPLI and other life insurance policies with assets that aren't needed to fund lifetime spending (the Legacy strategy, in the context of the UBS Wealth Way framework).

A Private Placement Variable Annuity (PPVA) may be a more appropriate for families who are looking to enhance the tax efficiency of assets that are earmarked for lifetime spending needs (i.e. the Longevity strategy). PPVAs are generally available for smaller dollar commitments than PPLIs, and are more appropriate for funds that you plan to access during your lifetime. PPVAs are structured as an annuity contract that can offer some of the same benefits as we outlined above as well as a stream of lifetime income. PPVA distributions are generally taxed as ordinary income.

Next steps

You should talk with your financial advisor and tax advisor about how these strategies may fit into your overall wealth, investment, and estate planning strategies—and compare them with alternative solutions to make the best choice. You may also want to review the UBS Advanced Planning Group's latest white paper, which provides a high-level overview of different life insurance strategies and how they can be structured to help you achieve your goals: Advanced Planning Group: Life insurance .

Each investor should consult his or her own tax advisor concerning the tax consequences of any investment strategy they make or are contemplating. Neither UBS Financial Services Inc nor any of its employees provide tax or legal advice.

For context on the long-term cost of tax drag, please see Investment strategy insights: Constructing and managing taxable portfolios , published 13 February 2023.

Read the full report, which includes next steps: Private placement strategies: Tax-efficiency for alternative investments 13 July 2023.

Main contributors: Justin Waring, Ainsley Carbone, and Katie Williams