Selling Your Business? This Insurance Unlocks Multigenerational Wealth

An older business owner stands outside his coffee shop, ready for customers. — (Image credit: Getty Images)

When selling a business, most people consider putting the proceeds into the stock market, real estate or another business venture. But what if you could use that money to build wealth with a longer timeframe in mind, potentially benefiting multiple generations?

Investing in stocks, bonds and various alternatives is a smart strategy for most people who are simply looking to build a nest egg for retirement and leave something to their loved ones.

But for families of significant means — especially those who have come into a sizable windfall through the sale of a business or an inheritance — private placement life insurance (PPLI) may be a better strategy because it provides a safeguard against income and estate taxes that can significantly deplete hard-earned wealth.

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The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

What is PPLI?

At its core, PPLI is a life insurance policy, but you shouldn't confuse it with the generic term, whole or universal life policies that you can buy online or through a local agent.

Rather than being built around a fixed death benefit or stock market index, PPLI is designed to serve as a tax-advantaged investment vehicle — one that also provides a tax-free death benefit.

PPLI is a viable option for accredited investors (those earning more than $200,000 individually or $300,000 jointly with spouse, or who have a net worth of at least $1 million).

It usually requires a minimum investment of $3 million, typically funded over three to five years. A medical exam is required, as with any life insurance, and some legal work is necessary to get the full benefits. In the end, the policyholder has a uniquely flexible and tax-efficient structure.

An investment vehicle wrapped in an insurance policy

PPLI is a great tool for investors because it offers the tax advantages of life insurance coupled with the investment flexibility of a private account.

Once the policy is funded, assets are placed into a separate account that can be invested across a wide range of options, including hedge funds, private equity, real estate and insurance-dedicated funds.

If you're looking to build wealth while mitigating tax liabilities, PPLI offers significant benefits, including:

Tax-deferred growth. Like a Roth IRA, investments inside the policy grow without triggering annual capital gains or income tax
Tax-free access. Policyholders can borrow against the cash value without generating taxable income, so long as the policy remains in force
Tax-free death benefit. When the insured dies, the death benefit is paid out to the beneficiaries income-tax free, and often estate tax-free if owned by an irrevocable trust
No contribution limits. Unlike IRAs or 401(k)s, there's no government-imposed cap on how much you can invest through a PPLI structure

Though it may sound cliché, PPLI is truly one of the industry's best-kept financial secrets. Even after years of working with smart, highly sophisticated investors, I'm still surprised how many people — even financial professionals themselves — are unfamiliar with this product.

Unfortunately, life insurance doesn't have a sterling reputation. Most of us have stories about untrustworthy salespeople trying to hard-sell us a policy. But if you move past the stereotype to look at the elements of this product, there's really nothing like it out there.

Tax efficiency seamlessly delivered

For wealthy families, tax drag can be severe — especially on income from alternative investments such as private credit, hedge funds or real estate partnerships.

In many cases, these investments generate short-term gains or distributions taxed at the highest ordinary income rates and involve K-1s at tax time.

PPLI shelters those returns inside an insurance wrapper, meaning no annual tax reporting, no K-1s and no erosion of after-tax returns due to distributions or realized gains.

In addition to tax efficiency, PPLI blends investment management and estate planning, often incorporating them into structures such as irrevocable life insurance trusts (ILITs) or grantor trusts, which makes it easier to plan for future generations while reducing estate taxes and maintaining control.

The numbers tell the story

If you want to truly understand the potential of PPLI, you need to compare it to a traditional stock-bond portfolio.

Let's say a business owner recently sold their company for $20 million. They've already maxed out their Roth IRA and qualified retirement accounts, but they still have substantial after-tax cash they want to invest.

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Working with their adviser, they fund a PPLI policy with $2 million a year over three years, totaling $6 million. Assuming the investment grows at 7% each year for 30 years, the total value of the policy at death would be about $38 million.

By comparison, if the same $6 million were invested in a taxable account growing at 7% annually for 30 years, the ending value would be about $22 million.

Each year's tax payment reduces the capital available to compound in the next, and over time, that drag can dramatically reduce returns. The impact can be even greater for residents of high-tax states, such as New York and California.

A small but select pool of customers

PPLI is not right for everyone. Given the high cost of funding the policy, PPLI is suited only for higher-net-worth investors.

But for people who own a family business that is about to be sold, or who may have an inheritance to manage, it is an option many financial advis e rs overlook.

Like all life insurance, PPLI works best when the policyholder is younger, offering greater affordability and allowing the policy to build value over a longer time.

Unlike other forms of life insurance that focus on short- and near-term objectives, PPLI is a tool for legacy planning.

And, amid the Great Wealth Transfer, which is expected to see $84 trillion pass from the Baby Boomers to younger generations, there is a growing need for different kinds of insurance and investment options.

Challenging 'too good to be true'

This is one time when the adage about death and taxes isn't necessarily true. In fact, even as an experienced adviser, I sometimes pinch myself that this type of product exists and is fully within the bounds of tax law.

If you're fortunate enough to be able to fund a PPLI policy, you should speak to an experienced adviser who can explain how it works and why it might be right for you.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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With a varied background in the financial services industry, Jamie is a Wealth Adviser who works closely with clients to develop a comprehensive approach to managing wealth and devising tailored initiatives to help them pursue their goals, address their concerns and act on their long-term aspirations. Prior to joining BRPW, Jamie was a financial adviser at Merrill Lynch Wealth Management, where she worked with high-net-worth clients to create financial strategies to match their needs and goals.