‘Legal’ insurance tax break blasted

The wealthiest Americans are using high-end life insurance policies as a way to dodge billions of dollars in taxes, according to a Senate report released Wednesday.

The Democrat-led Senate Finance Committee called the specialized life insurance plans a “booming tax dodge for the rich” and said such policies sheltered up to $40 billion.

While the tax advantages of the insurance plans are legal, the committee called for legislation clamping down on such plans and requiring more stringent tax disclosure rules.

The plans, called private placement life insurance, differ from normal life insurance policies, in which policyholders pay set premiums in order for their heirs to receive benefits following their death.

PRIVATE PLACEMENT LIFE INSURANCE PLANS

PPLI plans are aimed at much wealthier customers, who use the policies much like private investment accounts, according to the Senate report. PPLI plans are much more expensive than traditional life insurance, with initial premiums as high as $2 million – and policyholders are legally required to already have at least $5 million in other investments.

Once a policyholder has paid millions into their PPLI account, the insurer uses the money to buy shares in hedge funds, private equity firms and other investment vehicles that are out of the reach of most people, according to the report. Since the money is in a life insurance policy, any money made by the investors isn’t taxable, since the IRS typically can’t tax either income within insurance policies or life insurance payouts.

The money doesn’t have to remain locked up until the policyholder’s death, either. Like some other life insurance products, PPLI products allow buyers to take out tax-free loans based on the value of the policy. When the policyholder dies, heirs can inherit any money still in the policy without being liable for estate taxes, according to the Senate report.

“As is often the case with our tax code and the ultra-wealthy, the scandal here is what’s legal,” Sen. Ron Wyden, D-Ore., chair of the Senate Finance Committee, said in a statement. “The companies aren’t even trying to hide the fact that their PPLI policies were tax dodges for the very top – that’s precisely how they were promoted.”

The committee has called for controls ranging from more stringent reporting requirements to the complete prohibition of tax-free PPLI plans.

PLANS FOR THE RICHEST AMERICANS

The seven insurance companies that sell the most private-placement life insurance policies all cooperated with the Senate investigation, according to the Senate report. In total, the companies reported only 3,061 active PPLI policies, held by some of the wealthiest people in the nation.

In total, those wealthy Americans have invested $9 billion in PPLI plans – and that investment will be worth more than four times as much to their heirs after their death, according to a Washington Post report.

“This is a shocking concentration of wealth for an ultra-niche segment of the insurance market that represents just 0.003 percent of all individual insurance policies,” the committee’s report said.

With nearly a third of the market, John Hancock sells the most PPLI policies, according to the report. The average John Hancock PPLI policy confers more than $3 million in death benefits, the Post reported.

However, other companies have much larger average payouts. Investors Preferred has an average PPLI payout of $38 million, while Prudential’s average payout is $27 million. Prudential said the average net worth of its PPLI clients is more than $100 million.

A Prudential spokesperson told the Post in an email that its PPLI plans represent only about 1% of its insurance business, and that its plans follow the law.

“These federal and state rules provide a robust regulatory framework to, among other things, limit investment orientation and keep financial protection as the principal focus of the product,” she told the Post.

POSSIBLE LEGAL ISSUE

While the huge payouts from PPLI policies are legal, the Finance Committee questioned whether the insurance companies are allowing some of their wealthy policyholders to flout the law.

The so-called “investor control rule” allows life insurance to be tax-exempt because in most cases policyholders can’t decide where their money is invested – that decision is left to the insurance company.

But the committee questioned whether PPLI insurance providers are violating that rule by allowing clients to choose how to invest their premiums – without having to pay taxes on the resulting capital gains.

Wyden pledged to put forward legislation limiting PPLI plans. However, any legislation to eliminate tax advantages for the wealthy would likely face tough sledding in the Republican-controlled House. Last week, GOP House members grilled IRS Commissioner Danny Werfel about the fairness of his plan to pursue wealthy tax cheats, the Post reported.