An Easy to Maximize Your Investment Income...Private Placement Life InsuranceJanuary 1, 2010
This article continues my quest to lead the education parade for my readers in the areas of “How to make it” and “How to keep it.” Today’s subject matter—a little-known strategy—goes to the head of the class not only as 1) a star income tax saver, but also 2) an estate tax destroyer and 3) a superior asset protection device.
Yes, there is a single strategy that does all three. What is it? Private placement life insurance (PPLI). If you are fortunate enough to consider yourself an affluent individual, you’ll love every word you are about to read.
Who falls into the affluent category? Well, the most recent IRS data available (for 2007) shows the top 1 percent of taxpayers (earned $410,000 or higher) paid a whopping 40.4 percent of all federal income taxes. Astounding, because those taxpayers made only 22.8 percent of the reported adjusted gross income for 2007.
In my book, this 1 percent group really deserves a tax break. Note: Now more than ever, because the elected Washington geniuses are a sure bet to raise the income-tax rates on upper income earners.
Now, what is PPLI? It is a form of variable universal life insurance offered privately, rather than through a public offering. Variable life insurance has cash value dependent on the performance of one or more investment accounts in the policy. Since the insurance company cannot know the specific investment goals of each traditional policy purchaser, the carrier often settles for registering a set offering, including a selection of mutual funds or hedge funds as investment options within the policy. On the other hand, the carrier customizes the investment options to meet the needs of each PPLI owner/investor.
The prime purpose of PPLI is to make your investment profits (whether capital gains, dividend income or interest income) tax-free. Simply put, all policy investments are wrapped in a tax-free insurance envelope.
Just how significant are the wealth accumulation results of taxable vs. tax-free? The following example (created by Lewis Schiff, an Austin, TX lawyer) will astound you.
Facts: A PPLI policy insures a 45-yr.-old male paying $2.5 million in premiums for 5 years (a total of $12.5 million). The assumed rate of return is 10 percent (net of investment-management fees), taxed as ordinary income (at 40 percent, including federal and state taxes).
The table below provides the results, in $ millions (rounded):