Senate report blasts high-end life insurance plans as $40B ‘tax dodge’

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Specialized life insurance plans offered only to the wealthiest Americans are a vehicle for dodging billions in taxes, a Senate report released Wednesday charged.

Though the high-end plans’ tax advantages are legal, Democrats on the Senate Finance Committee blasted them as a “booming tax dodge for the rich” sheltering up to $40 billionand called for legislation restricting those plans as well as tougher tax disclosure.

The report sheds new light on a long-obscure segment of the insurance market and signals a possible new front for Democrats on tax legislation, even though passage in this polarized Congress, divided on everything from Ukraine aid to government spending, is unlikely. Any Democratic proposal to curtail these tax advantages would probably face opposition in the GOP-led House. Several Republicans questioning IRS Commissioner Danny Werfel last week spoke up for rich taxpayers and questioned the fairness of Werfel’s stated intentions to pursue wealthy tax cheats.

The plans, called Private Placement Life Insurance (PPLI), stand apart from the life insurance policies that millions of Americans purchase to hedge against a family breadwinner’s untimely death, in which buyers pay set premiums and expect a certain benefit for their heirs after they die, or make limited publicly traded investments within their life insurance policies.

PPLI customers, on the other hand, are a wealthy elite who use their life insurance policies more like private investment accounts. They are priced at the high end, with initial premiums as high as $2 million, and policyholders are required by law to already hold at least $5 million in other investments. Once the PPLI buyer pays millions into their insurance account, the insurer uses that money to buy shares in hedge funds, private equity companies and other investment options that are not open to most people.

Because the money is inside a life insurance policy, any money the investors make is beyond the IRS’s reach. Both income within insurance policies and life insurance payouts are typically not taxable.

Furthermore, the money doesn’t have to stay locked away. As with some other permanent life insurance products — like “whole life” policies that can be invested and distributed to heirs buyers can take out tax-free loans based on the value of the policy and access the cash while they are alive. And when the policyholder dies, heirs can inherit the money still in the policy without paying estate taxes.

The committee, chaired by Sen. Ron Wyden (D-Ore.), called for measures ranging from stronger tax reporting requirements to an elimination of tax-free PPLI plans altogether.

“As is often the case with our tax code and the ultrawealthy, the scandal here is what’s legal,” Wyden said in a statement. “The companies weren’t even trying to hide the fact that their PPLI policies were tax dodges for the very top — that’s precisely how they were promoted.”

The committee noted that the seven companies that sell the most PPLI policies in the country all cooperated with its investigation. Together, they reported just 3,061 active policies, held by some of America’s very richest people. Collectively, they have invested $9 billion in PPLI plans, which will be worth more than four times as much to their heirs upon their deaths.

“This is a shocking concentration of wealth for an ultra-niche segment of the insurance market that represents just 0.003 percent of all individual insurance policies,” the report said.

The committee report found that John Hancock had the most PPLI policies — nearly a third of those active with the seven largest holders as of the end of 2022 — with the company’s average policy conferring more than $3 million in death benefits. John Hancock said in an email to The Washington Post that it stopped issuing new PPLI policies in 2019.

Other companies have far larger payouts — Investors Preferred pays out $38 million on average, while Prudential distributes $27 million. Prudential said that its average PPLI client’s net worth is more than $100 million.

In an email to The Post, a Prudential spokeswoman said its PPLI plans represent about 1 percent of its insurance business, and that the company follows the law. “These federal and state rules provide a robust regulatory framework to, among other things, limit investment orientation and keep financial protection as the principal focus of the product,” she said.

The other five insurers did not respond to requests for comment from The Post. Senate and House Republican tax writers also did not respond.

The committee report included some of the plans’ marketing materials, showing that they tout the tax savings that plan holders can expect.

Even though these enormous tax-free payouts are legal, the committee’s report suggested that the insurance companies are letting some ultrawealthy policyholders go beyond what is allowed by law.

These policies may be bending what’s known as the “investor control rule,” which gives life insurance its tax-exempt status because policyholders in most cases can’t make specific decisions on where their money is invested — only the companies can.

The senators questioned whether PPLI companies are breaking that rule by letting clients make specific decisions about how to invest the premiums they pay, using life insurance accounts essentially as a private brokerage account in which they get to pick and choose what they buy and sell — without having to pay taxes on any resulting capital gains.

The report also pointed out that it’s hard for the government to catch anyone breaking the law through PPLI policies, because they have few reporting requirements to the IRS.

Wyden, without offering specifics, vowed to introduce legislation limiting PPLI plans, including requirements that PPLI policyholders report on their tax returns that they have the insurance so that the IRS can look more easily into whether they are abusing the policy.

The Tax Policy Center’s Steven Rosenthal, a liberal critic of other laws that allow wealthy people to shelter their money from taxes, questioned the senators’ allegations of illegality, pointing out that more common whole life insurance policies also allow a limited investor role for buyers. “It’s hard to draw the line there,” he said.

To Rosenthal, some other proposals that could work would be a ban on any life insurance plans holding nonpublic investments, like hedge funds and private equity, as well as a limit to the size of any life insurance policy’s tax-free death benefit, ending the PPLI plans’ mega-payouts at some multimillion-dollar level.

correction

A previous version of this article incorrectly said John Hancock sells PPLI policies. The company said that although it still holds older PPLI policies, it stopped issuing them in 2019. The article has been corrected.

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