Investment flexibility · A PPLI advantage
What PPLI changes about changing your mind
Outside a policy, every change of strategy is a sale: a gain is realised, tax is paid, and less money goes forward. Inside one, you change strategy, manager or even the insurance company, and nothing is sold in your name. Over thirty years that is one of the largest costs a family never sees on a bill.
One change of mind: ten million moved, 40 per cent of it gain
$952,000
tax paid to move it, held directly, at 23.8 per cent
$0
tax paid to move it inside a policy
That tax, left invested at 6 per cent for twenty years, would have grown to about 3.05 million. Every number changes in the calculator below.
In one minute
Why moving money inside a policy costs nothing
01
Without PPLI
Move from private credit to equity, replace a retiring manager, rebalance after a rate cycle: each time something is sold, a gain is realised, and tax is paid before the money moves on.
02
With PPLI
The insurer's account owns the investments. You choose the strategy and can change it, change the manager, or change the carrier, and nothing is sold in your name. The whole amount keeps compounding.
03
The catch
You pay at the door if you fund with appreciated assets, and at the exit if you surrender. You may choose the strategy, never the individual holdings. And your favourite fund has to run a vehicle open to insurance accounts.
Six decisions every serious portfolio makes in thirty years
The same wealthy investor, twice. The last one goes against the policy and is marked, because families should hear it first.
After eleven years in private credit, you want equity
Without PPLI
The position is sold. Eleven years of gain is taxed as ordinary income. What is left goes into equity.
With PPLI
You instruct the change. The account moves the money. Nothing is realised, and all of it goes into equity.
Your manager of a decade retires
Without PPLI
The fund is redeemed, the gain is taxed, and the remainder goes to the new manager.
With PPLI
A new manager takes the same mandate inside the same account. No sale, no tax.
You hold hedge funds and private credit
Without PPLI
Their income and short-term gains are taxed at ordinary rates every year, whether or not you took anything out.
With PPLI
Nothing is taxed year by year. The strategies punished hardest outside are the ones that gain most inside.
You lose confidence in the insurance company
Without PPLI
No equivalent. Changing banks was never taxed either, but it never relieved the tax on the changes above.
With PPLI
Section 1035 lets you exchange the contract for one from another carrier with no gain recognised. Illiquid holdings usually move as cash.
You need cash for a house or a business
Without PPLI
You sell something, pay the tax, and use the rest.
With PPLI
You borrow against the policy or take a withdrawal, on their own tax rules, without selling the strategy. Our page on policy loans has the detail.
Against the policy
You want to fund it with shares bought at a tenth of today's price
Without PPLI
Nothing happens until you sell them.
With PPLI
Putting them into the policy is a sale. The gain is taxed that year, in cash, with no rollover and no exception. This is the door.
It is not a loophole. The Internal Revenue Service has described an arrangement of exactly this kind approvingly since 1982. The only thing you may not do is run the money yourself, which is explained further down. Who can see the holdings once the insurer owns them is on our page on privacy and confidentiality.
Price one change of mind with your own numbers
Take the first situation above, eleven years of private credit moving into equity, and put your own figures on it. Every input is yours. The formula is printed underneath.
Price one change of mind
Your own numbers
Tax paid at this one change
Paid in the year of the decision, from money that would otherwise stay invested.
What that tax would have grown to by the end
| One change, held directly | |
| Your changes, evenly spaced, held directly | |
| The same changes inside a policy | Nothing realised |
The policy has costs of its own, which this box deliberately does not model. For the full comparison run the Tax Drag Calculator and the PPLI Break-Even tool.
Now multiply that across a thirty year holding period. Every manager who retires. Every fund that closes or drifts. Every rebalancing decision, every reallocation between strategies, every time a family office recommends something sensible and the family says yes. Each one is a taxable event, and each one takes a slice out of the base that would otherwise have gone on compounding. It is one of the larger costs in a wealthy family's investment life, and it is invisible, because it never appears on a fee schedule and nobody sends a bill for it.
Why this works, in one fact
One fact does the work here, and everything on this page follows from it. Inside a compliant policy, the investments belong to the insurer's segregated account. They do not belong to the family.
So when the allocation moves from credit to equity, the family has not sold anything. There is nothing realised, because there was nothing owned. There is no gain to report and no tax to pay. The money moves and keeps compounding on the whole of itself. The same fact has a second consequence, on who is able to see the holdings at all, which we take up on our page on privacy and confidentiality.
Two more things follow from the same fact, and both are worth knowing early. Because the assets are the insurer's, they can be institutional rather than retail: hedge funds, private credit, private equity, real assets, strategies that a family could reach anyway but would be taxed brutally for holding directly. And because nothing is being realised year by year, a family can hold the tax-inefficient part of its portfolio in the one place where inefficiency stops mattering. That second point is the subject of our tax efficiency page.
Where you pay: the door and the exit
The freedom in the middle is bought at the two ends, and a page that did not say so plainly would not be worth reading. This is the part of the conversation we have earliest, because it decides whether the rest is worth having.
1
The door
You may pay hereFund the policy with cash and nothing happens. Fund it with assets you already own and that transfer is a sale. The embedded gain is realised and the tax is paid then, in cash, from outside the policy.
There is no rollover, no deferral and no exception. Anyone suggesting otherwise has not read the list of provisions that could have provided one.
§1001(a) and (c). Details in the article on funding a policy with assets you already own, below.
2
Thirty years inside
Nothing is realisedChange the allocation. Change the manager. Change the carrier under §1035. None of it is a sale, because the family does not own the assets and never did.
The one thing a family may not do is run the money itself: choose the strategy, yes; instruct the trades, no.
Rev. Rul. 82-54 and Rev. Rul. 2003-91. §1035(a)(1). Explained in the technical half of this page.
3
The exit
You may pay hereHold the contract to the end and the death benefit is excluded from income tax. The deferral was permanent.
Surrender instead and the whole accumulated gain comes out at once as ordinary income, in one tax year. Loans and withdrawals sit in between, on their own rules.
§101(a) on the death benefit. §72(e) on surrenders and withdrawals. Covered under Getting out, below.
So the shape of the trade is: pay at the door if you bring assets rather than cash, move freely inside for as long as you hold it, and either hold to the end or pay at the exit.
Which tells you almost immediately who this suits and who it does not. It suits a family with cash to fund it, a long horizon, a portfolio heavy in strategies that are taxed hard every year, and an expectation of reorganising that portfolio several times. It does not suit a family whose only funding source is a very low basis holding they would have to sell to get in, who intend to take the money out in eight years, and whose portfolio is mostly buy and hold equity that was barely being taxed anyway. When the second description fits, we say so, because the calculator above answers the question before anyone has to.
Three constraints to understand before anything else
None of these is small print. Each one changes what a family can actually do, and each surprises people who were sold the menu rather than the mechanism. Here they are in plain terms. Each has its own page on this site, and the technical half below gives the authority.
You choose the strategy. You do not run the money.
A family may decide it wants credit, or equity, or a particular manager's mandate, and may change that decision later. It may not select individual investments, instruct trades, or discuss specific holdings with the person managing them. For a family used to being consulted on positions, this is the adjustment that takes longest, and it is not negotiable.
The investor control doctrineYour existing fund cannot be used.
If a family's favourite manager runs a fund that anybody else can invest in, the policy cannot simply buy into it. A separate vehicle, open only to insurance company accounts, has to be built and approved by the carrier. That is a project measured in months, not a form, and it is where timetables actually slip.
Adding a manager to a platformNothing can be too concentrated.
The account has to stay spread across several positions and is tested every quarter. A single stock, a single fund, or the family's own operating business cannot sit inside a policy as the main holding, however much the family would like it to.
The §817(h) diversification testA family that understands those three before the first illustration is printed will have a much better experience than one that meets them in month four. In our experience the third is easy to accept, the first takes a conversation, and the second is where the calendar goes.
Private assessment
Will your current portfolio fit?
An independent review can test an existing allocation against what a policy can actually hold and fund.
Confidential. Never shared.
There is no list of permitted assets
Read §817(h) and Treas. Reg. §1.817-5 end to end and you will not find an enumerated set of things a policy may hold. That absence is the single most useful fact on this page, and the reason so much of what carriers say is negotiable turns out not to be law.
The only asset-specific provisions in the entire scheme are narrow. §817(h)(3) gives favourable treatment to United States Treasury securities in a variable life account. §817(h)(6) treats each government agency or instrumentality as a separate issuer. The regulation aggregates all securities of the same issuer, all interests in the same real property project and all interests in the same commodity as one investment. Those are mechanics for a concentration test, not a whitelist.
What actually bounds the universe is four constraints, and it is worth being able to name them, because a family that can tell them apart can tell which objection from a carrier is a rule and which is a preference. First, diversification: a mathematical limit on concentration, tested quarterly. Second, public availability: a fund interest only looks through to its underlying assets where all beneficial interests are held by insurance company segregated asset accounts and public access is available exclusively through the purchase of a variable contract. Third, investor control, which is doctrine rather than statute and turns on what the policyholder can direct. Fourth, the carrier's own underwriting and the fund's own terms, which are contract and nothing more.
Hedge funds, private credit, private equity, real estate funds and insurance-linked strategies are eligible because nothing prohibits them and they can be arranged to satisfy the first three constraints. No authority names them. The Senate Finance Committee, describing the market rather than the law, records accounts holding hedge funds, private equity funds, real estate, private credit and other options. That is observation, not permission. We set out the first two constraints in detail in our work on sections 7702 and 817(h), the third in the investor control research, and the asset by asset position in what PPLI can own.
Getting assets in
The plain version is above. The constraint is not insurance law. It is section 1001, a provision of general application that most people have never read.
A premium is a payment, and paying it with property is a sale
Where property is transferred to an insurer in exchange for a contract, the transfer is a disposition of that property. §1001(a) measures the gain as the excess of the amount realised over adjusted basis, and §1001(c) says the entire amount of that gain is recognised except as otherwise provided. Nothing in subchapter L provides otherwise for a contribution of property as premium. The gain is triggered on the way in. We work through the whole question, including the qualified small business stock trap and the unanswered wash sale point, in our research on funding a policy with assets you already own.
The practical consequence is the reason we ask about basis in the first thirty minutes. A family sitting on a position with a very low basis is looking at paying tax now to avoid tax later, and whether that trade works depends entirely on the size of the embedded gain, the horizon and the character of the income the position throws off. For a founder considering this after a sale, the calculation is quite different, and we treat that case separately in planning after a liquidity event. In both, the honest sequence is to model the entry cost before anyone opens a carrier illustration.
Cash is simpler, and the timing is the hard part
Funding in cash removes the recognition question and replaces it with a scheduling one. Premium paid too quickly risks modified endowment contract status under §7702A, which leaves the death benefit exclusion intact and costs the family its access to the money on ordinary terms. Which is why premium in this market is typically paid over four or five years rather than in a single payment, and why a family holding cash from a sale and wanting it deployed immediately has to be told that the structure will not absorb it as fast as the market will. That conversation is unpopular and unavoidable.
Moving from an existing contract
Where the asset is already a life insurance contract, the position improves considerably. §1035(a)(1) provides that no gain or loss is recognised on the exchange of a contract of life insurance for another contract of life insurance, and §1035(d) takes the basis rules from §1031(d). A family holding an underperforming retail variable policy, or a policy at a carrier whose platform or service has deteriorated, can move without a tax event. This is the most underused flexibility in the whole product, because a great many people were sold retail contracts in the 2000s that they have never revisited.
Two cautions, both of which we have watched catch people. The exchange has to be an exchange rather than a surrender followed by a purchase, and the paperwork sequence decides that. And the MEC status of the old contract carries into the new one, so an exchange does not clean a policy that was overfunded fifteen years ago.
What can be changed once the policy is live
This is the flexibility question that matters over a thirty year holding period, and it has a clear answer in the rulings rather than in a brochure.
Reallocating is permitted, and the authority for it is old
Rev. Rul. 82-54, as the IRS itself describes it in Rev. Rul. 2003-91, involved a contract under which the purchaser could allocate premium among three funds and had an unlimited right to reallocate contract value among them before maturity. The holding is the one to keep: the purchaser's ability to choose among general investment strategies, for example between stock, bonds or money market instruments, either at the time of the initial purchase or subsequently, does not constitute control sufficient to cause the contract holders to be treated as the owners of the underlying shares. Choosing among strategies is not controlling the assets, and the timing of the choice does not change that.
Rev. Rul. 2003-91 gives the working picture in more detail, and it is worth knowing what the IRS actually blessed. Twelve sub-accounts available with a maximum of twenty permitted; a bond fund, large company stock, small company stock, international stock, a money market fund and sector funds; the holder able to allocate premiums among them and transfer between them, with one free transfer per thirty day period and a fee on further transfers. Against that, the holder could not select or direct a particular investment, could not sell, purchase or exchange assets, and could not communicate directly or indirectly with any investment officer regarding the selection, quality or rate of return of any specific investment. All investment decisions were made by the insurer or an independent adviser in its sole and absolute discretion.
Note what that permits. Movement between strategies. Movement more than once. A published transfer mechanic with a fee attached to frequency. That is the legal basis for the plain-language point at the top of this page, and it has been settled for over forty years.
Changing manager, and adding one
Manager change is the most common request we handle in years three to ten, and it splits into two very different problems. Changing between strategies already on the carrier's platform is an allocation instruction and takes days. Getting a new manager onto the platform is a project, and we set out what that project actually involves in our research on getting a manager onto a carrier's platform.
The obstacle is not tax law. §817(h)(5) says in one sentence that nothing in the subsection shall be construed as prohibiting the use of independent investment advisers. The obstacle is that the vehicle has to satisfy the look-through conditions, which means every beneficial interest held by insurance company segregated accounts and public access available exclusively through a variable contract. A manager's existing commingled fund does not meet that. A dedicated vehicle has to be established, the carrier has to complete its own operational and credit diligence on the manager and the administrator, and the documents have to be negotiated. Our experience is that this runs in months rather than weeks, and a family that signed a subscription agreement elsewhere in nine days finds it very hard to accept.
Two practical points that decide whether it is worth attempting. The first is size, because a manager will not stand up a dedicated vehicle for an allocation that does not carry its own operating costs, and that threshold is commercial rather than legal and varies enormously between managers. The second is that carriers differ more here than on anything else in a proposal. Some run broad platforms; some will build; some will tell you they will build and then discover an internal policy in month four. This is the question we press hardest during carrier due diligence, because it is the one that determines what the structure can do in year eight rather than what it looks like at signature.
Illiquid holdings and the problem of a quarterly number
Private assets inside a policy raise a mechanical difficulty that gets almost no attention and causes a disproportionate share of the trouble. The diversification test is a percentage, and a percentage needs a denominator four times a year.
The standard is fair value, determined in good faith
The regulation defines it at §1.817-5(h)(9): value means, for investments with readily available market quotations, the market value; and for other investments, fair value as determined in good faith by the managers of the segregated asset account. That is the entire federal tax standard. It names no methodology, requires no independent valuation, and mandates no audit. Our research on valuing illiquid assets inside a policy works through what that means in practice, including the three separate valuation cadences that do not line up.
For a portfolio of hedge funds and private credit that is workable, because administrators produce a net asset value. For a fund whose marks arrive sixty days after quarter end, or a direct holding with no third party valuing it, the practical burden lands on the account's managers and on the carrier's administrator, and the family is the party who feels it as delay. Frequency follows the testing dates rather than any separate rule: §1.817-5(c)(1) requires the test to be satisfied on the last day of each calendar quarter or within thirty days after.
Market movement does not break the test. A purchase can
This is the most useful provision in the regulation and it is routinely omitted from PPLI material. §1.817-5(d) provides that an account satisfying the requirements at the end of a quarter, or within thirty days after, is not considered non-diversified in a later quarter because of a discrepancy between the value of its assets and the diversification requirements, unless the discrepancy exists immediately after the acquisition of an asset and is wholly or partly the result of that acquisition.
Read it carefully, because it changes how an account has to be run. Drift caused purely by one position performing is not a failure. The thing that creates a failure is buying. So the operational discipline is not continuous rebalancing, which would be impossible with illiquid holdings and would itself raise questions about who is directing what. It is a check before every acquisition. In practice the risk arrives at the moments nobody is watching for it: a manager returning capital, which shrinks the denominator, or a capital call funded into an account that is already concentrated.
The policy has cash obligations of its own
A contract deducts cost of insurance monthly and asset based charges on a schedule, and those deductions have to come from somewhere. An account entirely committed to strategies with gates, lock-ups and capital calls can be economically excellent and operationally awkward. It is not a tax problem. It is a liquidity problem that turns into a forced redemption at a bad moment if nobody modelled it. We would rather set the operating cash aside at outset and accept a small drag than explain to a family in year four why a position had to be sold. There is also a new account start-up period at §1.817-5(c)(2), under which an account that is not a real property account is treated as adequately diversified until its first anniversary, and a real property account until the earlier of its fifth anniversary or the anniversary on which it ceases to be one. That relief is real and it is the window in which a private markets allocation gets built.
What cannot go in at all
Short, because the asset by asset analysis lives in the research linked above. The point here is which authority does the work, since the answer is rarely the one people expect.
A business the policyholder controls fails on investor control before it fails on anything else, and the authority is Rev. Rul. 77-85, described by the IRS as holding that a purchaser who selects and controls the investment assets in the separate account will be treated as the owner of those assets. It would independently breach the 55 per cent single investment limit in almost any single-asset structure. Publicly available funds fail the look-through conditions and are caught by Rev. Rul. 2003-92, under which the contract holder rather than the insurance company is the owner and must include the income currently.
On personal use assets, a residence, a car, art on the walls, we will say something the market generally does not: there is no ruling, regulation or case that addresses them by name in a section 817(h) account. The prohibition is a sound inference from investor control and from the distribution rules at §72, and it is an inference we act on without hesitation. It is still an inference, and we are not going to cite an authority that does not exist in order to sound more certain. The specific case of art is set out in our research on fine art and PPLI, and the residence question in the real estate piece.
One further point on eligibility that is stated wrongly almost everywhere. There is no SEC or FINRA rule requiring a PPLI purchaser to be an accredited investor and a qualified purchaser. FINRA Rule 5123 does not even apply, because Rule 5123(b) expressly exempts offerings of variable contracts. The requirement is derived: the policy interests are sold in reliance on Regulation D, and the fund relies on Investment Company Act §3(c)(1) or §3(c)(7), the second of which requires every owner to be a qualified purchaser under §2(a)(51), meaning not less than five million dollars in investments for a natural person. Carriers require both statuses uniformly. They require them because of the exemptions they rely on, not because a rule names the product.
Getting out
Exit flexibility is the least examined part of a proposal and the part a family is most likely to need. Three routes, with quite different consequences.
Surrender is the blunt one. The gain over basis is ordinary income under §72(e), which means a policy held for twenty years converts a long deferral into a single large ordinary income event. It is the reason PPLI does its real work as a death benefit structure and the reason we ask early what a family actually intends to do with the money, because the answer changes the premium schedule and sometimes the carrier. The arithmetic on what surrender costs against holding is worked through on the tax efficiency page.
Partial access is the ordinary route and runs by withdrawal to basis and thereafter by policy loan. On a contract that is not a modified endowment that is a workable structure with real edges, and we set it out in the research on liquidity and policy loans. On a MEC, distributions are income first under §72(e)(10), loans count as distributions, and a ten per cent additional tax falls on the includible portion before age 59 and a half under §72(v).
Exchange is the route people forget. §1035 works outbound as well as inbound, so a family unhappy with a carrier can move the contract rather than surrender it. What it does not do is move the holdings. The underlying positions belong to the segregated account of the original insurer, and a change of carrier ordinarily means those positions are realised inside the account and the value transfers as cash. For a portfolio of illiquid private funds that is not a decision that can be executed in a quarter, and it is the strongest argument for taking platform breadth and carrier stability seriously at the outset rather than assuming a future exit will be cheap. The mechanics, including the same insured rule, what a policy loan does to the arithmetic and the final regulations published in July 2026, are in our research on moving a policy between carriers.
The bill that would remove most of this
The bill has not been enacted and may never be. It is aimed precisely at the arrangements described above, which makes it a design consideration now rather than a headline to watch.
Senator Ron Wyden introduced S. 4279 in the 119th Congress on 13 April 2026. It would add a new §7702C and define an applicable private placement contract as a private placement contract failing the bill's requirements, a private placement contract being one that would otherwise qualify as life insurance or an annuity and that requires the holder to represent specified income, assets, education or licensing in order to rely on a securities law exemption. A contract escapes that status only where the assets in the account support at least twenty-five private placement contracts and the proportion of each asset supporting a contract is the same as for every other contract, with all contracts held by the same person aggregated as one. Holders of an applicable private placement contract would be treated as owning their share of the account assets and receiving their proportionate share of net income.
The mechanism is worth understanding because of what it targets. A twenty-five contract pro rata requirement is an attack on the single policyholder account and on bespoke allocation, which is to say on flexibility itself. As drafted it applies to contracts issued before, on or after enactment, with a 180 day transition to exchange, convert or liquidate. It follows the Senate Finance Committee report of 21 February 2024, which put the domestic market at roughly 3,061 policies held by around 3,000 people with at least 40 billion dollars of face value, while noting the actual market is likely considerably larger.
We take no position on whether it should pass. What we do tell families is that a structure whose value depends entirely on a bespoke single-holder account carries a legislative risk that a broadly diversified allocation across established insurance dedicated funds does not, and that this is now a live design consideration rather than a theoretical one. It is worth checking the bill's current status before relying on anything written about it, including this.
Frequently asked questions
Can I contribute my existing shares or fund interests as premium?
Where a carrier accepts property rather than cash, the transfer is a disposition of that property for tax purposes. Section 1001(a) measures the gain as the excess of the amount realised over adjusted basis and section 1001(c) recognises the entire amount, with nothing in subchapter L providing otherwise for a contribution of property as premium. A low basis position therefore triggers tax on the way in, which has to be modelled before the structure is priced.
Can I move an existing life insurance policy into a PPLI contract?
Yes. Section 1035(a)(1) provides that no gain or loss is recognised on the exchange of a contract of life insurance for another contract of life insurance, with basis carried over under the section 1031(d) rules. The transaction has to be structured as an exchange rather than a surrender followed by a purchase, and modified endowment contract status attaching to the old contract carries into the new one.
Can I change the investment allocation after the policy is issued?
Yes, and this is the core advantage. Rev. Rul. 82-54, as described by the IRS in Rev. Rul. 2003-91, holds that the ability to choose among general investment strategies, at the time of initial purchase or subsequently, does not constitute control sufficient to treat the holder as owner of the underlying assets. Because the assets belong to the insurer's segregated account rather than to the policyholder, moving between strategies is not a sale and produces no taxable gain. What the holder may not do is select or direct a particular investment, buy or sell assets, or discuss the selection, quality or return of a specific holding with an investment officer.
Can my existing investment manager run money inside the policy?
Sometimes, and it is a project rather than an instruction. Section 817(h)(5) states that nothing in the subsection prohibits the use of independent investment advisers, so tax law is not the obstacle. The obstacle is that the vehicle must satisfy the look-through conditions at Treas. Reg. section 1.817-5(f), meaning all beneficial interests held by insurance company segregated accounts and public access exclusively through a variable contract. An existing commingled fund does not qualify, so a dedicated vehicle has to be established and approved by the carrier. This typically runs in months, and whether a manager will do it depends on the size of the allocation.
How often does a PPLI account have to be valued?
Quarterly. Treas. Reg. section 1.817-5(c)(1) requires the diversification test to be satisfied on the last day of each calendar quarter or within thirty days after, which requires a valuation of every asset in the account at that point. The standard is set at section 1.817-5(h)(9): market value where quotations are readily available, and otherwise fair value as determined in good faith by the managers of the segregated asset account. No methodology, independent valuation or audit is prescribed by the regulation.
Does a position that grows past the concentration limit break the policy?
Not by itself. Treas. Reg. section 1.817-5(d) provides that an account which satisfied the test at a quarter end is not treated as non-diversified in a later quarter because of a discrepancy between asset values and the limits, unless the discrepancy exists immediately after an acquisition and is wholly or partly caused by it. Market drift is therefore tolerated. A purchase that creates or worsens the breach is not, which is why the operational discipline is a check before every acquisition.
Is there a list of assets a PPLI policy is allowed to hold?
No. Neither section 817(h) nor Treas. Reg. section 1.817-5 contains any enumerated list of permitted or prohibited asset classes. The universe is bounded by four constraints: the diversification test, the public availability condition for look-through treatment, the investor control doctrine, and the carrier's own underwriting and the fund's own terms. The first three are law. The fourth is contract, and it is the one most often presented as though it were law.
What happens to the underlying investments if the policy is surrendered?
The gain over basis is ordinary income under section 72(e). The positions belong to the insurer's segregated account rather than to the policyholder, so a surrender ordinarily means those positions are realised within the account and value is paid out in cash. The same applies on a section 1035 exchange to another carrier: the contract moves, the holdings generally do not, which makes an exit from a portfolio of illiquid private funds a multi-quarter exercise.
Sources and authorities
The constraints on this page are statutory and regulatory. Where something is carrier practice rather than law, the text says so, because the two are constantly conflated in this market and the difference decides what is negotiable. This describes United States federal law as it stood at the date of last review and is not advice on any particular set of facts.
- 26 U.S.C. § 817(h), the diversification requirement, with the general safe harbour at (h)(2), the Treasury securities rule at (h)(3), the look-through at (h)(4), the express permission to use independent investment advisers at (h)(5), and the separate issuer rule for government agencies at (h)(6).
- Treas. Reg. § 1.817-5: consequences of non-diversification at (a), the 55, 70, 80 and 90 per cent limits at (b)(1)(i), quarterly testing at (c)(1), the start-up period at (c)(2), the market fluctuation rule at (d), the definition of a segregated asset account at (e), the look-through conditions and their exceptions at (f), and the definition of value at (h)(9). The regulation has not been amended since T.D. 9385, 73 FR 12265, of 7 March 2008.
- 26 U.S.C. § 851(b)(3), the regulated investment company diversification test taken up by the alternative safe harbour. Note that § 1.817-5(b)(2) still cross-refers to § 851(b)(4) as that provision was numbered in 1989; the test moved to § 851(b)(3) when the Taxpayer Relief Act of 1997 repealed the short-short gross income test, and the statute at § 817(h)(2)(A) was conformed while the regulation was not.
- Rev. Rul. 2003-91 and Rev. Rul. 2003-92 on investor control, with the earlier rulings they describe, Rev. Rul. 77-85, Rev. Rul. 81-225 and Rev. Rul. 82-54, and the cases Christoffersen v. United States, 749 F.2d 513 (8th Cir. 1984) and Webber v. Commissioner, 144 T.C. 324 (2015).
- Rev. Rul. 2005-7, applying the look-through through successive tiers of funds, Notice 2016-32 on government money market funds, and Rev. Proc. 2008-41 on correcting an inadvertent diversification failure.
- 26 U.S.C. § 1001(a) and (c), the general rule that the entire amount of gain or loss on the sale or exchange of property is recognised, and 26 U.S.C. § 1035(a)(1), under which no gain or loss is recognised on the exchange of a contract of life insurance for another contract of life insurance.
- 26 U.S.C. § 72(e) on the taxation of amounts not received as an annuity, which governs what a surrender costs, and § 7702A on modified endowment contract status, which is what a compressed funding schedule risks.
- Investment Company Act § 3(c)(1) and § 3(c)(7) with § 2(a)(51) on qualified purchasers, and 17 C.F.R. § 230.501(a) and § 230.506 on accredited investors and private placements.
- S. 4279, 119th Congress, introduced 13 April 2026, which would add a new § 7702C, and the Senate Committee on Finance report of 21 February 2024 that preceded it. No such bill has been enacted, and this page describes law as it currently stands.
Last reviewed 2 September 2026. This page is educational and is not legal or tax advice. See our editorial standards for how we source and correct this material.
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Last updated 2 September 2026
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Editorial standards