The PPLI glossary

Privately offered life insurance with an investment-linked cash value and a death benefit. Being privately offered does not mean every policy looks the same: contract design, permitted investments and tax treatment all vary. Qualification, costs, access rights and investor eligibility depend on the arrangement and the jurisdiction.

Check in practice: Request the policy form and offering documents. For a US-oriented proposal, assess life-insurance qualification, diversification and investor control separately.

26 USC 7702; 26 CFR 1.817-5.

PPLI structure and requirements

The US federal tax doctrine under which a policyholder can be treated as the owner of underlying investment assets when the facts establish sufficient control. That ownership can make the investment income taxable to the holder despite the insurance contract.

Check in practice: Review contractual powers and actual communications. Revenue Ruling 2003-91 accepts allocation among insurer-established options on its stated facts; it does not authorise direction of individual trades or every method of selecting a manager.

Revenue Ruling 2003-91.

Investor control rules

The federal tax definition of a life insurance contract: the contract must qualify under applicable law and satisfy either the cash value accumulation test or the guideline premium requirements together with the cash value corridor. It is separate from MEC testing.

Check in practice: A failure can trigger ordinary-income inclusion under section 7702(g). Do not describe every consequence as cancellation of the policy: subsection (g) includes specific rules for the death benefit, and relief provisions may apply.

26 USC 7702.

Life insurance tax qualification

The US diversification requirement for segregated asset accounts supporting variable contracts. The general regulatory concentration limits are 55%, 70%, 80% and 90% for the largest one, two, three and four investments, respectively.

Check in practice: Apply the investment-counting and timing rules, conditional fund look-through, alternative tests and relevant exceptions. A position that looks too concentrated on one date is where the analysis starts, not a finding of failure. The regulation also addresses market fluctuations, startup periods and relief for inadvertent failures.

26 USC 817(h); 26 CFR 1.817-5.

Diversification and compliance

A life insurance contract falling within the definition in section 7702A, including a relevant contract that fails the seven-pay test or is received in exchange for a MEC. Material changes and benefit reductions can affect testing; the number of years over which premiums are paid is not a safe harbour.

Check in practice: MEC distributions generally take income out first; loans can count as distributions. Section 72(v) can impose an additional tax on the taxable amount, subject to exceptions. Obtain the carrier's policy-specific testing records.

26 USC 7702A; 26 USC 72(e) and (v).

MEC and seven-pay rules

An industry term for a fund structured for investment through insurance accounts. Compliance depends on how the fund is actually set up and who invests in it, not on the name. The regulation provides conditional look-through treatment for specified investment companies, partnerships and trusts, including restrictions on beneficial ownership and access, with permitted exceptions.

Check in practice: Check the actual investors, fund access and look-through conditions. Revenue Ruling 2003-92 addresses partnership interests available outside insurance. Fund diversification and investor control require separate analysis.

26 CFR 1.817-5(f); Revenue Ruling 2003-92.

Investment strategies inside PPLI

A portfolio managed separately under an investment mandate, rather than solely through units in a pooled fund. In the PPLI context, the insurer's account, appointed manager and contractual arrangements determine how that portfolio is held and operated.

Check in practice: Separate management does not give the policyholder unrestricted trading authority. Review who appoints the manager, permitted communications, diversification monitoring and access to assets. What matters legally is how the arrangement works in practice.

Revenue Ruling 2003-91; 26 CFR 1.817-5.

PPLI account mechanics

An account whose assets and liabilities are tracked separately under the relevant legal and contractual framework. For US diversification testing, a segregated asset account has a specific regulatory meaning. That tax definition is about diversification testing; whether the assets are protected from an insurer's creditors is a separate question of insurance law.

Check in practice: Identify the governing law and contract. Delaware section 2932(a)(5) and New York section 4240(a)(12) provide conditional separate-account protections. Both come with conditions, and neither means the account's assets are immune from insolvency, loss or payment delays.

26 CFR 1.817-5(e); 18 Del. C. 2932(a)(5); NY Insurance Law 4240(a)(12).

Separate accounts and creditor claims

A category defined in Investment Company Act section 2(a)(51). The natural-person route generally requires at least $5 million in defined investments. Other categories cover certain family companies, trusts and persons meeting different conditions; the individual threshold is not a universal test for every entity.

Check in practice: Measure investments under the applicable rules, not total net worth or the proposed premium. Determine which entity must qualify under the offering structure. Qualified purchaser and accredited investor are distinct categories.

15 USC 80a-2(a)(51); 17 CFR 270.2a51-1.

Investor eligibility and minimums

An investor within a category in Regulation D Rule 501(a). Individual routes include net worth exceeding $1 million, excluding the primary residence, or specified income tests. Designated professional credentials and certain other statuses also qualify; entity categories have their own conditions.

Check in practice: The income route includes both the preceding two years and a reasonable expectation for the current year. Being accredited does not mean a product suits you, and it does not make you a qualified purchaser. Check the exemption and actual subscription terms.

17 CFR 230.501(a); SEC accredited-investor guidance.

Accredited investor requirements

Borrowing under a life insurance contract against available policy value, subject to the insurer's terms. Interest, limits and outstanding indebtedness affect policy economics. A loan can reduce the net death benefit and increase lapse risk.

Check in practice: A qualifying non-MEC loan is generally not an immediate taxable distribution. MEC loans can be treated as distributions under section 72(e), and lapse or surrender with debt outstanding can create taxable income. Check both the contract and the tax calculation.

26 USC 72; SEC variable life guide.

Policy loans and liquidity

The insurance company that issues the policy and owes the contractual obligations. A group brand, distributor, adviser and issuing legal entity are not necessarily the same organisation.

Check in practice: Confirm the legal issuer, licensing, financial statements, policy charges and scope of guarantees. A strong issuer protects you from some risks, but not from investment losses or every operational failure. Look at separate-account assets and general-account promises one at a time.

SEC variable life guide.

Carrier due diligence

An institution providing asset safekeeping and related services, which can include trade settlement, records and reporting. Its exact duties depend on the custody agreement and applicable law; custody and discretionary investment management are different roles.

Check in practice: Map the insurer, account holder, custodian and any subcustodians. Check legal title, asset segregation, permitted liens, instruction authority and treatment on failure. A well-known custodian is a good start, but the agreements are what tell you whether policy assets are protected and how quickly they can be reached.

OCC custody services.

Custody and carrier review

In this glossary, the policyholder means the owner holding contractual rights under the policy. The owner may be an individual, trustee or another permitted legal person, and may differ from the insured and beneficiary. Legal usage can vary by jurisdiction.

Check in practice: Record who can exercise each right and in what capacity. Ownership matters for estate tax, but whose name is on the policy is only part of it: under section 2042, incidents of ownership and proceeds payable to the estate also count.

26 USC 2042.

Trust ownership of insurance

The person whose life is covered by the insurance contract. The insured need not be the policy owner or beneficiary. For cover on more than one life, the policy specifies which death or combination of deaths triggers the benefit.

Check in practice: Confirm the covered life or lives, underwriting requirements, exclusions and claim conditions in the issued contract. Payment on the insured's death still depends on the policy being in force and on its exclusions and other terms.

NAIC life insurance guidance.

Policy roles and mechanics

A person or entity designated to receive policy proceeds when the insured event and the contract's conditions are met. A trust, estate or other eligible entity may be named. Primary and contingent designations serve different functions.

Check in practice: Check the recorded designation, replacement provisions, ownership rights and claim process. Who receives the proceeds and how they are taxed are separate questions. Naming a particular beneficiary does not by itself keep the proceeds out of the insured's estate.

NAIC life insurance guidance; 26 USC 2042.

Beneficiaries and estate planning

An irrevocable trust established to own life insurance and administer proceeds under its terms. ILIT is a planning term, not a statutory category. Whether the policy and death benefit stay outside the insured's taxable estate depends on how the trust is drafted, funded and run.

Check in practice: Test retained rights, proceeds payable to the estate and funding arrangements. Section 2042 addresses life insurance estate inclusion; section 2035 can bring certain transferred interests back into the estate when death occurs within three years. The trust deed and actual conduct matter.

26 USC 2042; 26 USC 2035.

ILIT ownership and estate inclusion

A planning term for an irrevocable trust created by one spouse for the benefit of the other spouse, often with additional beneficiaries. Distribution rights depend on the trust deed. The donor does not gain an unrestricted personal withdrawal right merely because a spouse is a beneficiary.

Check in practice: Examine retained interests and grantor-trust treatment separately. Sections 2036 and 672(e) address different tax questions. Model what the deed permits if the beneficiary spouse dies or the marriage ends. Access through a spouse can end, and estate exclusion has to be designed for.

26 USC 2036; 26 USC 672(e).

SLAT powers and limitations

A planning term for a trust intentionally structured so that the grantor is treated as owner of all or part of it for federal income tax purposes, while seeking a different result for gift and estate tax. Income tax and transfer tax each apply their own legal tests.

Check in practice: Section 671 attributes the relevant trust income, deductions and credits to the tax owner. Estate exclusion is a separate matter, so review retained rights, transfers and the applicable estate-tax provisions before relying on the intended result.

26 USC 671; 26 USC 2036.

Grantor trusts and estate treatment

In section 2632(c), GST trust is a defined category used for automatic allocation of generation-skipping transfer tax exemption, subject to detailed exceptions and elections. In planning discussions, the phrase may be used more loosely for a trust intended to benefit later generations.

Check in practice: Check the statutory category, exemption allocations and inclusion ratio. Sections 2631 and 2642 govern separate parts of that analysis. Whether transfers to grandchildren or more remote beneficiaries escape GST tax depends on those allocations and the inclusion ratio, not on what the trust is called.

26 USC 2632(c); 26 USC 2631; 26 USC 2642.

Generation-skipping transfer tax

A planning description for a trust intended to hold and administer assets for multiple generations. Its permitted duration, powers, distributions and creditor treatment depend on the governing law and instrument. Its federal tax treatment follows the ordinary gift, estate and GST rules; there is no separate exemption for dynasty trusts.

Check in practice: Check the applicable duration rules and the income, gift, estate and GST tax analyses. Delaware section 503 is one state's approach, not a worldwide rule. Adding PPLI will not fix a badly drafted trust, and it brings its own ongoing costs and insurance requirements.

25 Del. C. 503; 26 USC 2642.

Multigenerational trust planning

The planning choice of which investments to hold in which accounts or ownership structures. It differs from asset allocation, which sets the portfolio's mix of investments. It is a way of analysing a portfolio, not a legal test that a PPLI policy has to pass.

Check in practice: Compare the same investment exposure across direct ownership and insurance. Include annual taxes, all fees, funding, liquidity, access taxes and the exit date. Use the actual contract rules. A high headline tax rate makes insurance worth testing; only the full comparison shows whether it is the better home for the investment.

26 USC 72: policy access tax rules.

Asset location and after-tax comparison