The term private placement life insurance (PPLI) denotes a form of whole life insurance in which the cash values of each policy are segregated and invested individually rather than pooled.
Standard whole life insurance policies typically pay out interest on policy cash value. Standard investment-linked policies pool assets, invest them through investment funds or other investment vehicles, and then distribute returns equally between all policies.
PPLI policies differ in that the assets of each policy are segregated. A policyholder may be able to choose the makeup of their individual policy’s investment portfolio, and the individual returns earned through the investment of their policy’s cash value are credited directly to their cash value and accrue until the policy matures. This arrangement enables policyholders to choose investment solutions which align with their risk-tolerance and investment goals, and to earn returns in based on their individual investment choices.
Typically, PPLI policies provide relatively low death benefits (term life insurance), and are designed to serve as investment vehicles rather than life insurance solutions. As with other forms of whole life insurance, a portion of each premium paid by a policyholder covers the actual cost of life insurance, a portion is contributed to the policy’s cash value, and a portion goes to cover the administrative fees charged by the insurer for managing the policy.
Because PPLI policies are managed individually, with each policy’s cash value being segregated and invested separately, the administrative costs associated with this kind of policy may be relatively high. Additionally, policyholders may pay fees and charges generated by the investment vehicles which make up their portfolios (brokerage fees and the TERs of investment funds, for example). These fees will typically be deducted directly from a policy’s cash value.
As investment-linked policies, the cash value of PPLI policies is directly linked to the performance of their investment portfolios. This means they can potentially deliver higher returns than would be achievable using standard whole life insurance policies. But it also means that a policy may lose cash value if investments perform badly. Because whole life insurance policies have high administrative fees, investments must perform well enough to cover administrative fees and still deliver reasonable returns.
Taking out term life insurance and investing directly (using an affordable online broker, for example) rather than investing through an insurance company cuts out the added administrative costs. In most cases, this approach makes more financial sense.
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