Sen. Ron Wyden (D-OR), chair of the tax-writing Senate Finance Committee, has vowed to stop use of private placement life insurance (PPLI) as a tax shelter. He calls PPLI a “$40 billion tax shelter.” Sen. Wyden conducted an 18-month investigation into PPLI and said the results of the investigation prove that PPLI is used only by the ultra-wealthy and serves little to no true-life insurance purpose. Instead, he said, it is no more than a tax shelter for the ultra-wealthy that is not generally available.

PPLI, a product that Sen. Wyden said accounts for only 0.003 percent of all individual life insurance policies, requires at least $1 million and more often up to $5 million or more to be invested in a tax-favored life insurance policy, Sen. Wyden’s investigation found. The policies permit loans at favorable rates and thus allow their policyowners to leverage savings that grow without tax liability (until withdrawn or paid out in death benefits). The policies also allow considerable flexibility in policyowner investment choice.

Sen. Wyden said he plans to introduce legislation that would substantially enhance PPLI reporting requirements, and possibly treat PPLI loans as withdrawals and therefore subject to current income tax liability. “I'm a strong defender of life insurance as a source of financial security for hardworking American families and retirees,” Sen. Wyden said. “But that's not what's going on with these tax-dodging private placement policies that are available only to the ultra-wealthy. When you subject these policies to even the slightest bit of scrutiny, it's clear that this is just a tax shelter for the investments of the mega-rich masquerading as life insurance. None of this is available to middle-class Americans.”

Sen. Wyden continued, “As is often the case with our tax code and the ultra-wealthy, the scandal here is what's legal. 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. It's obvious that this is an abuse of the rules that are intended to protect typical American families, so Congress must change the law to put a stop to it.”

Prospects: While it is unlikely that Congress will act on PPLI policy rules in the near term, the acute need for offsetting revenue and the spiraling federal deficit make it probable that PPLI tax rules will be a target in upcoming tax debates. NAIFA is watching this issue closely.

NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.