Private Placement Life Insurance
Private placement life insurance is a life insurance contract, offered privately, used by families and family offices that can fund it at institutional size. The U.S. income-tax treatment of inside buildup depends on the contract still being life insurance, and on the family not running the account. We advise on which trust or person owns the contract, and on how that owner meets the foreign trust and the estate-tax file. The carrier, the illustration, and the tax opinion stay with the insurance adviser and the tax adviser.
The family's wealth adviser keeps the relationship and the portfolio. Our piece is the legal owner: a trust or other holder whose documents a trustee and a custodian can administer, coordinated with the rest of the stack on Private Wealth. We do not sell policies, and we do not describe a contract as tax-free.
Four roles are usually different people. The policyholder owns the contract and pays the premiums. The insured is the life. The beneficiary receives the death benefit. The insurer issues the contract and holds the separate account. The investment manager runs that account under a mandate with the insurer, not under day-to-day instructions from the family. The family's asset is the contract. The securities sit in an account the insurer owns for this purpose. A hedge fund or an operating company retitled into the policy is not the design. The working note is PPLI as an investment wrapper.
Who owns the contract decides more than the illustration. An irrevocable trust is often the owner, so the insured does not hold the rights that section 2042 can pull into a U.S. estate: changing the beneficiary, borrowing, surrendering, assigning. If the owner is a foreign grantor trust and the settlor is treated as the owner under section 672(f), income-tax and estate-tax exposure can still sit with the settlor, including when the settlor is the insured. If the owner is a foreign non-grantor trust, the trust is a separate taxpayer, and a later distribution to a U.S. beneficiary is a trust-distribution question even if a death benefit was excluded at the trust under section 101(a). Classification is on Foreign Trusts. The longer ownership note is PPLI in estate and income tax planning.
Under section 2105(a), the proceeds of insurance on the life of a nonresident alien are generally not property situated in the United States. Stock of a domestic corporation generally is, and a nonresident alien's estate-tax exemption on U.S.-situs property is the $60,000 amount under section 2102. The comparison is narrow. It does not apply if the family is treated as owning the assets inside the account. It does not cover U.S. real property held outside the policy. It says nothing about tax in the family's home country, which may look through the contract. For a family that will remain nonresident, the estate-tax holding structure is on Wealth Structuring for Foreign Nationals. A policy is not a substitute for that analysis.
Families sometimes place a contract in the stack while everyone relevant is still a nonresident, as part of planning that has to finish before residency. A policy bought in that period is not automatically a compliant U.S. contract on the day residency starts. If a U.S. person owns it, section 7702, section 817(h) diversification, and investor control apply to that owner. Cash-value life insurance with a foreign insurer is commonly an FBAR and Form 8938 question. Premiums paid to a foreign insurer can attract a U.S. excise tax. If the insured can change the beneficiary, borrow, or surrender, section 2042 is in the estate-tax file even when the carrier is outside the United States. The timing of the move is Pre-Immigration Planning.
It is built for an international family or a family office with a long holding period, a carrier that will issue to a trust or a non-U.S. owner, and an investment menu of insurance-dedicated funds rather than the family's existing positions. Minimum premiums are set high enough that this is not a retail product, and the charges — cost of insurance, administration, and fees inside the dedicated funds — sit on top of the investment result. The tax adviser models whether those charges belong in the plan. The adviser who already manages the capital stays in that role. We design the owner so the trustee can hold the contract and the file matches the rest of the structure. See PPLI for international families.
A person buying term insurance, or a retail variable policy from a household carrier, is in a different market. A family that needs the money on a sale timetable should not park that money in a contract that is built to be held. A family that wants to choose the securities, vote them, or place a single operating company inside the account is describing investor control, and a policyholder treated as the owner of the account is taxed currently on its income. A contract that fails section 7702, or a variable account that fails the diversification limits in section 817(h), does not get the inside-buildup treatment of a life insurance contract. Section 7702A can also treat a contract funded too quickly as a modified endowment contract, with a different rule for loans and withdrawals. We do not tell a family that any of those tests are met. The tax adviser reads the illustration. A short comparison with a private annuity is in PPLI, PPVA, and private annuities.
On a contract that is life insurance under section 7702, inside buildup is generally not taxed currently to the policyholder, and amounts received by reason of the insured's death are generally excluded under section 101(a), subject to the rules that take that treatment away. Loans against cash value are generally not income on a contract that is not a modified endowment contract. None of that is a description of a particular policy. It is the statute, and it fails if the contract fails or if the family directs the account. Choosing a strategy from the carrier's menu is a different fact from selecting the securities. The insurance counsel and the tax adviser opine on the contract. We do not.
What we do is place the owner. An irrevocable trust that is supposed to keep incidents of ownership off the insured has to be drafted that way: the insured is not trustee with a power over the policy, and the trust is not still the insured's for estate-tax purposes. For a nonresident insured, section 2042 is not the statute; section 2105(a) is. A trust can still be the right owner for succession and for who may deal with the carrier. If that trust is foreign, Form 3520 and the grantor or non-grantor classification are part of the same file, on Foreign Trusts. If the family is about to have a U.S. person in it, the contract has to be read again before that date, on Pre-Immigration Planning, not after the first premium paid as a resident.
The adviser who brought the family remains the adviser. We support that relationship with an owner, a deed, and a title a custodian and a trustee can administer. Portfolio decisions and the insurance product stay where they already are.
Tell us who would own the contract, who is the insured, and whether a trust already exists. If you are the family's adviser or the insurance broker, say so. We will follow up to schedule a conversation. No commitment required.