A break-even worked from the load, the annual policy charges and the tax drag of the strategy it wraps, with the cases where PPLI never pays.
Private placement life insurance (PPLI) pays for itself when the tax drag of the investments it wraps exceeds the policy's annual charges, for long enough to recover the upfront load. On an illustrative 20,000,000 premium invested in a strategy earning 8.0 per cent, all of it taxed yearly at 40.8 per cent, a 2.0 per cent load and 0.80 per cent a year of charges break even in 1.09 years. Wrap an investment whose tax drag is 0.80 per cent or less and the policy never pays.
Worked in full in The Family Office Professional by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
PPLI is a variable universal life policy that must qualify as life insurance under section 7702, priced institutionally, whose cash value is invested in insurance-dedicated funds or a separately managed account. Growth inside the policy is not taxed while it stays there, and the death benefit is received free of income tax. For a family office the question is not whether the tax deferral is valuable, which it obviously is, but whether it is worth more than what the policy charges, for the specific assets that would go into it.
| Input | Value |
|---|---|
| Premium | 20,000,000 |
| Return, net of manager fees, before tax and policy charges | 8.0% |
| Tax on the return outside the policy, all ordinary income, taxed yearly | 40.8% |
| Premium-based load at funding | 2.0% |
| Legal and structuring | 100,000 |
| Administration and M&E, % of account a year | 0.60% |
| Cost of insurance, % of account a year (held flat) | 0.20% |
The strategy is deliberately tax-inefficient, the kind of asset PPLI is usually built for: private credit or a hedge fund strategy whose return arrives as interest or short-term gains. In practice the cost of insurance rises with age; holding it flat keeps the break-even visible.
Invested on day one = 20,000,000 × (1 − 2.0%) − 100,000 = 19,500,000, 97.50% of the premium.
Return inside the policy = 8.0% − 0.80% = 7.20%, untaxed.
Return outside = 8.0% × (1 − 40.8%) = 4.736%. Tax drag: 3.264%.
Break-even years n = ln(20,000,000 ÷ 19,500,000) ÷ ln(1.0720 ÷ 1.04736) = 1.09
In Excel: =LN(20000000/19500000)/LN(1.072/1.04736)
The upfront cost of 500,000 is recovered in little more than a year because the annual gap between the two returns is large. After 20 years the taxable account holds 50,460,281 and the policy 78,330,395: 27,870,114 more, 1.55 times as much.
The break-even depends on one comparison: the tax drag outside against the policy's annual charges. Keep everything else and change the drag.
| Tax drag outside | After-tax return outside | Break-even | Advantage after 20 years |
|---|---|---|---|
| 3.26% (all ordinary income) | 4.74% | 1.1 years | 27,870,114 |
| 2.00% | 6.00% | 2.2 years | 14,187,686 |
| 1.50% | 6.50% | 3.9 years | 7,857,494 |
| 1.20% (equity-like, low turnover) | 6.80% | 6.8 years | 3,779,125 |
| 0.80% | 7.20% | Never | −2,008,472 |
| 0.60% | 7.40% | Never | −5,059,921 |
At a drag equal to the 0.80 per cent of charges the two accounts grow at the same rate and the policy never recovers its load. A low-turnover equity portfolio, whose drag can be close to the 1.20 per cent shown here, needs almost seven years to break even and delivers a fraction of the benefit. The rule is to put the least tax-efficient assets in the policy, and nothing else.
The benefit assumes the policy is held. Surrender the policy after 20 years and the gain over the premium is taxed as ordinary income: 78,330,395 becomes 54,531,594, only 4,071,313 more than the taxable account, an annualised 5.14 per cent. The full advantage comes through the income-tax-free death benefit, or through policy loans on a policy that is not a modified endowment contract and is never allowed to lapse. Avoiding that status usually means paying the premium over several years rather than in one sum as here.
The common mistake is to compare the policy's costs with the investor's top tax rate. The tax rate is not what PPLI saves; it saves the tax drag of the particular assets inside it, which depends on how their return is taxed and when it is realised. A family that funds a policy with a low-turnover equity portfolio is paying 0.80 per cent a year to defer a drag of not much more. The second mistake is ignoring the rules that keep the policy's tax treatment: the separate account must meet the diversification rules of section 817(h), and under the investor control doctrine the policyholder cannot direct the investments, which limits which managers and strategies qualify.
Compute the tax drag of the assets that would go in, compare it with the policy's annual charges, and fund the policy only if the gap is wide and the holding period long. On these figures, wrapping a fully taxed 8.0 per cent strategy repays its costs in about a year; wrapping a tax-efficient one never does. How to measure tax drag in the first place is worked in how to calculate tax drag on a taxable portfolio, and the cost model and working documents for this book are on the free companion page for this case.
Only for tax-inefficient assets held for a long time. In the illustrative case a strategy whose 8.0 per cent return is all taxed yearly at 40.8 per cent has a tax drag of 3.264 per cent; inside a policy charging 0.80 per cent a year it breaks even in 1.09 years. An equity-like portfolio with a 1.20 per cent drag takes 6.8 years, and one at 0.80 per cent never pays.
The gain over the premiums is taxed as ordinary income, which removes most of the advantage. In the illustrative case the policy is worth 78,330,395 after 20 years; surrendered and taxed at 40.8 per cent it leaves 54,531,594, only 4,071,313 more than the taxable account, an annualised 5.14 per cent. The full benefit assumes the policy is held until death.
Typically a premium-based load at funding plus annual charges on the account. The illustrative policy takes 2.0 per cent of the premium and 100,000 of setup, so 19,500,000 of a 20,000,000 premium is invested, then 0.60 per cent a year of administration and M&E plus 0.20 per cent of insurance cost: 0.80 per cent a year in all.
This article is one calculation from The Family Office Professional. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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