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Recent developments increase the attractiveness and chart a course for hedge fund life insurance and annuities
For more than a decade, hedge fund investors have used private placement life insurance (PPLI) to eliminate or defer income tax on hedge fund and other tax-inefficient earnings. With proper estate planning, they've been able to use it to reduce or eliminate the estate tax as well. PPLI can even provide a large tax-free death benefit for a cost that is often much less than the tax savings gained.
Despite these significant benefits for appropriate hedge fund investors, many conservative taxpayers have been unwilling to seriously consider PPLI invested in hedge funds, for fear that the Internal Revenue Service would not allow the tax benefits. It is true that in recent years, the IRS has issued rulings and changed the regulations to prevent the tax benefits on certain PPLI invested in hedge funds. But these very same rulings constitute a form of IRS guidance that many advisors who are experienced in PPLI say now helps them chart a course to achieving significant tax benefits when PPLI cash values are invested in hedge funds. This clarity has led more hedge fund investors to embrace PPLI, sparking innovations, which in turn makes PPLI attractive to more hedge fund investors.
It's important, therefore, to understand hedge fund life insurance, hedge fund annuities, their potential benefits for income tax, estate tax and asset protection, their investorcontrol issues, and the latest innovations for these products. It's also useful to know which clients would most be interested in PPLI, and how such an investment would fit into their investment portfolios and estate plans. Although the underlying investment of the cash value of PPLI does not have to be hedge funds-it could be in a managed account that employs a tax inefficient strategy or in other investments-we will refer to the product as hedge fund life insurance (HFLI) or annuities.
LIFE INSURANCE
Hedge fund life insurance is life insurance with a separately invested account for that policy's cash value, which is invested in a hedge fund or a group of hedge funds.
The pure insurance portion is essentially low-cost term life insurance, which allows the entire investment, including the cash value, to qualify as...