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An individual with a higher income and net worth can face unique financial challenges, such as preserving capital, maximizing tax efficiency, and complex estate planning. As a result, many seek unique financial tools for these situations, such as private placement life insurance.
This type of policy is designed for investors with more complicated financial situations, offering death benefit protection alongside wealth-building potential and tax benefits. Let’s dive deeper into how private placement life insurance works, its features, and some alternatives to help you select the best policy that suits your needs.
Private placement life insurance is a form of variable universal life insurance sold privately to applicants with high net worth and more complex financial situations. As a universal life insurance policy, it helps offer lifelong death benefit protection and cash value that grows with each payment, earning tax-deferred interest and gains and eventually becoming an additional wealth source.
Securities and Exchange Commission (SEC) regulations require you to be an accredited investor to purchase these policies. That involves meeting one of the following criteria:1
Here is how each private placement life insurance feature works:1
Unlike traditional life insurance policies, private placement life insurance offers flexible premiums. This helps you adjust your premium payments based on your financial circumstances and strategy. For example, if the economy experiences a downturn, you can reduce premium payments and invest the savings in assets that may perform better. On the other hand, you could increase premiums to have more cash value available for investments you believe are priced at a discount.
Private placement life insurance offers a cash value growth component. Part of each premium payment funds this component, where your earnings can grow tax-deferred.
Once it grows, you can borrow from it with no credit check at reasonable rates or withdraw from it. As a result, the cash value turns into an additional liquidity source for high net worth individuals (HNWIs) seeking to diversify their investment account options.
Like traditional variable universal life insurance, private placement policies helps you invest cash value in stocks, bonds, and mutual funds. However, you can also invest in unique and alternative assets only available to accredited investors. Some investment options these policies may offer include hedge funds, private equity, and real estate.1 These often come with more risk but may offer high potential returns and diversification.
Private placement life insurance’s previous features come with several tax advantages that suit HNWIs well. First, the death benefit is not taxed as income for beneficiaries. Additionally, if structured properly in an irrevocable life insurance trust (ILIT), it may not count toward your estate tax threshold.2
The cash value provides tax benefits as well. It grows tax-deferred, helping you enjoy more growth and faster potential wealth-building. That means if you sell investments for gains in the account, you won’t owe taxes immediately. You can then reinvest more capital in other assets as a result. Loans are not taxed as income as long as the policy remains in force. Withdrawals may also avoid taxes if you withdraw less than your total premiums paid.
Don’t wait until it’s too late. Help cover yourself and your family with coverage from Aflac.
Private placement life insurance shares features with other permanent life insurance policies, but also contains some unique features and differences. Here are some differences between traditional and private placement life insurance:
Private placement life insurance tends to suit those with more assets and complex financial situations. Here are some potential policyholders who could benefit from private placement life insurance:
Private placement life insurance generally suits policyholders with a higher net worth and complex financial plans. If it’s not right for you or you don’t qualify, here are several alternative policies to consider:
Term life insurance offers cost-effective, fixed premiums but has no cash value and lasts for a fixed period of 10 to 30 years. This makes term life insurance a good option for prospective policyholders who don’t need an investment component and want the most cost-effective solution.
Whole life insurance is a permanent life insurance policy, covering you for life in exchange for higher premiums. Premiums are fixed, unlike private placement life insurance. Its cash value growth component earns tax-deferred interest at a cost-effective, guaranteed rate. This may offer a smaller potential reward but minimal risk. As a result, whole life insurance can suit policyholders at various wealth levels who need lifelong coverage and prefer capital preservation over aggressive potential growth.
Universal life insurance also offers lifelong coverage and cash value. However, you can adjust premiums and death benefits as needed. Reducing premiums lowers your death benefit and slows cash value growth. Raising premiums increases your death benefit and can accelerate cash value growth. The cash value grows tax-deferred at a fixed, guaranteed rate, like whole life insurance.
Private placement life insurance serves a specific portion of the population — high net worth individuals who need advanced financial tools to help fit their complex financial circumstances. If you aren’t in this segment of the population or prefer a simpler policy, Aflac’s selection of life insurance policies could provide options that suit you better. Speak with an agent today to learn more and get a quote.
1ValuePenguin - How Does Private Placement Life Insurance Work? Updated March 1, 2024. https://www.valuepenguin.com/life-insurance/private-placement-life-insurance. Accessed May 1, 2024.
1Investopedia - 7 Reasons for an Irrevocable Life Insurance Trust (ILIT). Updated February 26, 2024. https://www.investopedia.com/articles/personal-finance/092315/7-reasons-own-life-insurance-irrevocable-trust.asp. Accessed May 1, 2024.
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
Coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, coverage is underwritten by American Family Life Assurance Company of New York:
Aflac life plans - 68000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. 65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B61JWO & ICC18B61JTO. In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series/Whole: In Arkansas & Delaware, Policy Q60100M. In Idaho, Policy Q60100MID. In Oklahoma, Policy Q60100MOK. Not available in Virginia. Q60000 series/Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C. Not available in Virginia.
Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations and exclusions.
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