In April the White House announced President Joe Biden’s “American Families Plan.” Within this proposed bill is a substantial increase to the top federal tax rate on long-term capital gains and qualified dividends.

This rate would increase from 23.8 percent to 39.6 percent for higher income earners. When including the net investment income tax, the top federal rate on capital gains would be 43.4 percent. Rates would be even higher in many U.S. states due to state and local capital gains taxes, leading to a combined average rate of 48 percent compared to about 29 percent under current law.

These changes, if enacted, will make it more difficult to retire comfortably. The challenge is planning during a time of uncertainty. Nevertheless, we can be certain of two things:

1. The national debt is climbing. As of September 2021, the national debt is greater than 28 Trillion!
2. The government will be looking for ways to increase revenue through tax changes and/or by decreasing benefits offered.

With all this in mind, a particular product has been rising to the forefront as a potential work-around to Biden’s proposal: private placement life insurance (PPLI).

Private Placement Life Insurance (PPLI) vs Cash Value Life Insurance

Recently you’ve probably seen a lot of articles and blogs talking about Private Placement Life Insurance (PPLI) as a “loophole” to Biden’s proposal. Cash value within a PPLI policy has tax-deferred accumulation, making it an effective tool to mitigate the effects of a capital gains tax increase. However, PPLI policies are only available to ultra-wealthy individuals. PPLI policies have extremely high minimum-premium requirements and is offered only to “accredited” or “qualified” investors—those who have substantial investable assets, a documented investment track record, and are exceptionally wealthy.

It seems odd to me that so many of these articles and blogs only refer to private placement life insurance when traditional cash value life insurance policies, such as an IUL, can be utilized in the same way. This means that any high-net-worth individual can access the tax benefits of life insurance without needing to meet any other special qualifications.

As you know cash value life insurance falls into the category of permanent life insurance. A portion of its premiums go into an account to build the cash value, while the other portion pays for the policy. With the recent MEC limit increase combined with the tax-deferred accumulation features of cash value life insurance, any individual can mitigate the impact of Biden’s proposal (assuming their policy is structured properly.)

High-net-worth individuals may be able to short pay policies when they want to get the funding out of the way without running into the issues of creating a MEC.