Common PPLI Implementation Mistakes and How to Avoid Them

Private Placement Life Insurance (PPLI) offers substantial tax advantages and wealth preservation benefits for high-net-worth individuals. However, proper implementation is critical to ensuring these policies deliver their intended benefits. At Colva Services, we regularly see clients who encounter preventable issues with their PPLI strategies. This article outlines the most common PPLI implementation mistakes and provides practical guidance on how to avoid them.

Insufficient Diversification of Investment Options

One of the most frequent mistakes in PPLI implementation involves inadequate investment diversification. PPLI policies must meet the diversification requirements outlined in IRC Section 817(h), which generally requires that no single investment can constitute more than 55% of the portfolio, no two investments more than 70%, no three investments more than 80%, and no four investments more than 90%.

Failing to meet these diversification requirements can disqualify the policy from receiving favorable tax treatment. To avoid this mistake, work with advisors who understand these requirements and can help structure a properly diversified investment portfolio within your PPLI policy. Regular monitoring of investment allocations is essential, particularly when market fluctuations might push allocations beyond permitted thresholds.

Ignoring the Investor Control Doctrine

The investor control doctrine remains one of the most misunderstood aspects of PPLI implementation. This IRS doctrine states that if the policyholder exercises too much control over the investment decisions within the policy, the tax advantages may be lost.

To avoid this mistake, ensure that your involvement in investment decisions stays within appropriate boundaries. This typically means selecting investment options from a menu provided by the insurance company or appointing independent investment managers. Maintain clear documentation showing that ultimate investment authority rests with the insurance company, not the policyholder. Avoid communication patterns that suggest you’re directing specific trades or investment decisions.

Inadequate Premium Funding

PPLI policies require substantial funding to work effectively. Many clients underestimate the minimum premium levels needed or fail to structure the premium payments optimally. Inadequate funding can lead to policies that don’t generate sufficient returns to offset costs or that require unexpected additional premiums later.

For most effective PPLI implementation, consider funding the policy with the maximum amount permitted under the modified endowment contract (MEC) rules if tax-free access to cash value during lifetime is important. Alternatively, if the primary goal is maximizing the tax-free death benefit, a MEC structure might be appropriate. Work with advisors who can model different funding scenarios based on your specific objectives.

Selecting the Wrong Insurance Carrier

Not all insurance carriers offering PPLI products are created equal. Selecting an inappropriate carrier for your specific situation can lead to higher costs, limited investment options, or potential service issues.

When choosing a PPLI provider, consider factors beyond just the lowest cost. Evaluate the carrier’s financial stability, experience with PPLI products, available investment platforms, jurisdictional options, and ongoing service capabilities. For international clients, understanding how the carrier handles cross-border issues becomes especially important. The right carrier should align with your long-term objectives and provide flexibility as your needs change.

Poor Integration with Overall Estate Plan

PPLI should complement your broader estate planning strategy. A common mistake is implementing PPLI in isolation without considering how it interacts with other planning structures such as trusts, business entities, or charitable giving vehicles.

To maximize benefits, integrate your PPLI policy with your comprehensive estate plan. Consider ownership structures carefully—whether the policy should be owned individually, by a trust, or by another entity. For many clients, an irrevocable life insurance trust (ILIT) offers additional estate tax benefits when properly structured. Ensure your estate planning attorney, tax advisor, and insurance professional collaborate on implementation.

Overlooking International Tax Considerations

For clients with international connections, failing to account for multi-jurisdictional tax implications can create significant problems. Different countries treat PPLI differently for tax purposes, and compliance requirements vary widely.

If you have connections to multiple countries—through citizenship, residency, or asset location—work with advisors who have specific expertise in international tax planning. This includes understanding tax treaties, foreign account reporting requirements, and the specific treatment of insurance products in relevant jurisdictions. The goal is ensuring your PPLI strategy works effectively across all applicable tax systems.

Disregarding Ongoing Compliance Requirements

PPLI isn’t a “set it and forget it” solution. Many policyholders mistakenly neglect ongoing compliance and management requirements after implementation. This includes monitoring diversification requirements, ensuring proper reporting, maintaining appropriate documentation, and adapting to changes in tax laws.

Establish a regular review process for your PPLI policy, ideally at least annually. Work with advisors who offer ongoing support and monitoring, not just initial implementation. Keep thorough records of all policy-related activities, particularly regarding investment decisions and any communications with the insurance carrier.

Mismanaging Policy Withdrawals and Loans

The tax advantages of PPLI include potential tax-free access to cash value through policy loans and withdrawals when structured properly. However, mismanaging these distributions can trigger unexpected tax consequences.

Before taking any distributions from your PPLI policy, consult with your tax advisor. Generally, withdrawals should be limited to the policy basis (premiums paid), with policy loans used for accessing amounts above basis. Be aware of potential tax consequences if the policy later lapses with an outstanding loan. Proper planning of distributions helps preserve the tax advantages that make PPLI attractive.

Unrealistic Performance Expectations

Some clients enter PPLI arrangements with overly optimistic expectations about investment performance. While PPLI offers tax advantages, these benefits must be weighed against the insurance costs and potential investment limitations.

Set realistic expectations by working with advisors who provide transparent projections that include all policy costs. Understand that the primary advantage of PPLI is tax efficiency, not necessarily superior investment returns compared to taxable investments. The compounding benefit of tax-free growth becomes more significant over longer time horizons, making PPLI typically more suitable for long-term planning.

Conclusion

PPLI remains a valuable planning tool for wealthy individuals seeking tax efficiency and asset protection. By avoiding these common implementation mistakes, you can maximize the benefits of your PPLI policy while minimizing potential complications. We specialize in helping clients navigate the intricacies of PPLI implementation. Our team works closely with you and your existing advisors to create and maintain PPLI strategies that align with your overall financial objectives.