What Private Placement Life Insurance Promises
Private placement life insurance (PPLI) is marketed as a type of permanent life insurance with an aura of exclusivity. The idea is that you can put tax inefficient assets — private equity, venture capital, hedge funds or other institutional‑level investments — inside a policy. Those investments then compound tax deferred, and the policy’s cash value grows. Because you are investing in assets that might grow faster than traditional index funds, the cash value could become large. As the cash value grows, the cost of insurance declines. You can borrow against that cash value, and because a loan is not income, you avoid creating taxable income. When you die, the death benefit pays back the loan and anything left goes to your heirs.
That’s the pitch. You get access to investments that are otherwise hard to hold in a tax efficient way, enjoy tax deferred growth and have the flexibility to tap the policy for liquidity during your life.
The Hidden Costs and Complexity
In practice, PPLI introduces layers of complexity and cost that are often glossed over. For one, it isn’t free. You pay insurance costs and a fee drag that can range from about 50 basis points to well over 1 percent. The underlying investments can also have their own fees. Those investments are often illiquid and carry the same risks we discuss whenever we talk about alternatives. You’re taking on a different risk profile, and you may not be rewarded for that risk.
The loan itself isn’t free. You pay interest on the amount you borrow, and whatever you borrow reduces the death benefit. Over time, all of those costs add up. The complexity of the policy also makes it harder to evaluate whether you are actually better off. In my view, this is the central problem with any form of permanent life insurance: the benefits are easy to pitch, but the fee drag and complexity are very real.
A Simpler Alternative: Build, Borrow, Die
A simpler way to achieve many of the same objectives is what I call “build, borrow, die.” You invest in a regular brokerage account. Your money compounds, and you accumulate embedded gains. If you need liquidity, you don’t sell and trigger taxes; instead, you take a securities‑backed line of credit. You borrow against your portfolio, pay yourself back over time and, when you die, your heirs receive a step‑up in basis. The tax consequences disappear, and you didn’t have to layer on an insurance product with its own costs.
Imagine holding a low cost index fund that grows from $10 million to $25 million. Rather than sell and incur capital‑gains taxes, you use that portfolio as collateral for a line of credit and live off the proceeds. Upon death, the basis steps up for your heirs. You accomplish the same liquidity and tax deferral that PPLI promises, without the extra fees and complexity.
Final Thoughts
Private placement life insurance combines all of the issues I have with permanent life insurance with an extra layer of illiquid investments and fees. While the idea of tax deferred growth and tax free loans is appealing, you can often achieve similar results in a more straightforward way. Before committing to a PPLI policy, take a hard look at the cost drag and the complexity it introduces. In many cases, a simple investment strategy coupled with a securities‑backed line of credit can get you where you want to go with fewer moving parts.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on private placement life insurance, listen to the full podcast episode here.