More and more high-net-worth investors are looking toward private placement insurance strategies. These strategies, called PPVA’s (Private Placement Variable Annuities) and PPLI (Private Placement Life Insurance), can create significant tax saving. Together, these strategies allow their investors to avoid tens of millions in taxes. Simultaneously, they make possible investment in the rapidly expanding private credit market. The private credit market boomed — exploding from $1 trillion in 2020 to an astounding $1.5 trillion in early 2024. This change has made insurance strategies an increasingly attractive option compared to traditional investment approaches.
Investors have been extremely attracted to the private credit market. This newfound popularity craze has been largely driven by its extraordinary growth and the ability to see major return on investment. According to Preqin, an alternative data provider who specializes in tracking the burgeoning private credit market, this sector is predicted to experience robust growth. It is projected to grow to a staggering $2.6 trillion by 2029. As a result, there’s been increased interest in PPVA/ PPLI strategies. Together, these strategies offer far deeper tax benefits than those available from direct investments in loans.
Investors using PPVA and PPLI can mitigate the hefty tax burdens typically associated with direct lending returns, which are taxed as ordinary income. As the top federal ordinary income tax rate is currently 40.8%, these insurance tactics are extremely attractive. The tax rate on long-term capital gains is much lower, limited to a maximum of 23.8%. By taking advantage of PPVA and PPLI, investors can enjoy these low tax rates, ensuring they receive the most return possible after-tax.
As the private credit market expands, so does the attractiveness of these private placement insurance schemes. They offer tax benefits while being effective replacements for more traditional investing approaches. The private credit sector is one of the fastest growing asset classes. This significant growth speaks to a larger trend within the investment industry, as cutting-edge financial solutions such as PPVA and PPLI gain more traction.