Just as the 118^th Congress ended last month, then Senate Finance Committee chairman and now ranking member Sen. Ron Wyden (D-OR) offered a bill to contain private placement life insurance (PPLI). The bill died when the 118^th Congress adjourned sine die on January 3, but Sen. Wyden is expected to reintroduce his legislation early this year.

The Wyden bill would characterize PPLI (as defined in the bill) as “not life insurance” for income tax purposes. That means that the death benefits, cash values, and policy loans of PPLI that runs afoul of the definition of PPLI in the legislation would be taxable. And – to make this perfectly clear – the legislation specifically subjects such PPLI contracts to tax on their death benefits, cash values, and policy loans.

The bill disqualifies as life insurance “applicable private placement contracts” (APPCs) when such policies are held by a person (trust, pass-through or other related party) that has had to register an exemption under securities laws, and has a specified minimum amount of income or assets (the minimum amount is not specified in the legislative language), has completed a minimum level of education, OR holds a specific license or credential.

The bill gives regulation-writing authority to Treasury—it appears likely that the minimum amount of income or assets, the minimum level of education, and the specific license(s) or credential(s) that would define an APPC would be filled in by Treasury in those regulations. Sen. Wyden has repeatedly referred to PPLI contracts as those that carry premiums of $10 million or more.

The bill also specifies that once a policy is an APPC, it remains an APPC even if the "minimums" are no longer met later in the policy's life. And, the legislation is retroactive--it would apply, as of the date of enactment (DOE), to all existing as well as to new policies, although the law does allow a 180-day period (after the DOE) during which the policy owner can exchange (or surrender) the policy for a policy that does qualify (under tax rules) as life insurance.

The bill also imposes adverse tax consequences at the life insurer (issuer) level. These include loss of premiums paid and reserve deductions. The bill also contains special rules applicable to PPLI (APPCs) issued by foreign insurers,

The bill also includes reporting requirements (that carry a $1 million fine for failure to comply). In addition to information on the owners of the policies and on the investments held within the policy, the reporting rules require the issuer to tell the government (IRS/Treasury) and the policyholder about any distributions--including policy loans-- made from the APPC

Prospects: As tax writers hunt for offsetting revenue for the reconciliation tax bill expected early in the 119^th Congress, issues like PPLI could be in the mix. It would be a tax increase, but technically not a “new tax,” because APPCs would simply be carved out of the tax rules that govern life insurance. That could insulate against charges that the PPLI bill would increase life insurance taxes.

Plus, PPLI is specifically a (very) rich person’s product and as such may not trigger opposition from populist Republican lawmakers. On the other hand, disqualification of PPLI as life insurance triggers taxes on death benefits, inside buildup, and policy loans—tax rules at the heart of permanent life insurance. A complex product, PPLI rules are equally complicated. That could depress interest in looking at the tax rules that govern PPLI. Finally, “tax the rich” is a Democratic policy position and thus may cause Republicans to ignore proposed changes to rules that impact only a very few people.

In short, it is too soon to tell whether this issue will have legs during the upcoming tax bill debate. The PPLI proposal could be viewed as “low-hanging fruit,” a relatively noncontroversial source of revenue. Or lawmakers could see it as an attack on permanent life insurance and refuse to consider it. We will keep you posted.

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