2028 Section 7702 Changes: Why Private Placement Life Insurance (PPLI) Planning Matters Now

For affluent families, business owners, and investors, life insurance can do much more than provide a death benefit. When properly designed, permanent life insurance can also provide tax-deferred or tax-free accumulation, long-term liquidity, and an efficient way to transfer wealth.

For clients considering Private Placement Life Insurance (PPLI), these benefits can be especially significant. PPLI combines the tax advantages of life insurance with access to a broader range of investment strategies, making the efficiency of the underlying insurance structure particularly important.

A change expected under Internal Revenue Code Section 7702 beginning in 2028 could make newly issued accumulation-oriented life insurance policies less efficient than policies established under today's rules. For clients already considering PPLI or other investment-oriented life insurance strategies, that makes the next two years an important planning window.

Why Section 7702 Matters

Section 7702 of the Internal Revenue Code establishes the requirements a policy must meet to qualify as life insurance for federal income tax purposes. In simple terms, the rules determine the relationship between the amount of premium contributed, the policy's cash value, and the amount of life insurance death benefit that must be maintained.

That relationship is extremely important for an investment-oriented policy. For a traditional protection-oriented policy, the primary objective may be maximizing death benefit for a given premium.

The less life insurance death benefit that must be purchased relative to the amount of premium invested, the lower the potential insurance costs and the greater the opportunity for long-term life insurance policy cash-value accumulation.

The Section 7702 Changes Created a More Favorable Environment

Congress significantly modernized Section 7702 in late 2020. Prior to those changes, the law relied on interest-rate assumptions established decades earlier, when interest rates were considerably higher. Updating those assumptions gave insurers greater flexibility to design policies capable of accepting more premium relative to the required death benefit. For accumulation-oriented policies, this was an important development.

It potentially allows for:

• More efficient funding. More premium can generally be contributed for a given amount of death benefit.
  

• Lower relative insurance costs. A policy may require less death benefit relative to the capital being accumulated.
  

• Improved cash-value efficiency. More of the policy's economics can be focused on long-term accumulation rather than purchasing additional insurance protection.
  

• Greater planning flexibility. The structure can be particularly useful for affluent families, business owners, and institutions seeking tax-efficient long-term strategies.

Insurance companies needed several years following the 2020 legislation to redesign products and obtain state approvals. Today, leading carriers have products specifically designed to take advantage of the updated Section 7702 framework. That includes newer generations of Private Placement Life Insurance, an area in which TRC Financial has extensive experience.

What Is Expected to Change in 2028?

Due to changes in market interest rates, the tax compliance calculation rates under Section 7702 will adjust on January 1, 2028. These modifications will directly reduce allowable maximum funding limits for new policies:

• Adjusted Benchmark Rates: Rates used for 7-Pay, Guideline Level Premium (GLP), and Cash Value Accumulation Test (CVAT) corridor calculations will increase from 2% to 3%. Guideline Single Premium (GSP) rates will rise from 4% to 5%.
  

• Lower Premium Limits: Maximum allowable 7-Pay and GSP premium funding limits are estimated to decrease by 10% to 40% depending on the insured’s age, with younger individuals experiencing the largest reduction.
  

• Higher Required Death Benefits: Increased CVAT corridor factors will require policies to carry higher death benefits relative to their cash value, increasing baseline insurance costs.

Why This Is Particularly Important for PPLI

Private Placement Life Insurance is designed for qualified investors seeking to combine institutional investment management with the tax characteristics of life insurance. Unlike conventional retail life insurance, the economics of a properly structured PPLI policy are generally focused heavily on investment accumulation and minimizing the cost of the life insurance chassis.

That makes Section 7702 especially relevant.

1. Maximize Premium Contributions: Lock in higher funding thresholds before lower capacity rules take effect.
   

2. Protect Policy Performance: Avoid the lower internal rates of return (IRR) projected for post-2027 max-funded policies.
   

3. Prevent Restrictive Triggers: Policies issued after January 1, 2028, cannot be backdated to use legacy rules. Furthermore, material changes made to existing policies post-2027 (such as death benefit increases) will subject the policy to the lower funding limits.

Over a 20, 30, or 40-year planning horizon, seemingly small differences in annual costs can compound into meaningful differences in life insurance policy value. This is why Section 7702 is not simply an obscure life insurance tax provision for PPLI clients. It directly influences how efficiently the policy can be designed.

Should You Establish a Policy Before 2028? Why Private Placement Life Insurance (PPLI) Planning Matters Now

The answer depends on your objectives. There is no reason to purchase life insurance simply because a tax-compliance calculation is changing. The insurance must first make sense as part of your overall financial, investment, estate, or business planning.

However, if PPLI or another investment-oriented life insurance strategy is already under consideration, timing should now be part of the analysis. Establishing the appropriate policy before the anticipated 2028 change may provide an opportunity to design the contract using today's more favorable funding assumptions.

It is also important not to wait until December 2027. For clients considering Private Placement Life Insurance (PPLI), planning matters now because significant policies require thoughtful design, financial documentation, medical underwriting, carrier and product selection, and coordination with the client’s investment, tax, and estate planning advisors. Larger and more complex policies can take considerable time to structure and implement, making it important to begin the evaluation and planning process well before the anticipated 2028 changes take effect.

Existing Policies Should Be Reviewed Too

The upcoming change is not only relevant to clients considering new coverage. Clients who already own permanent life insurance may benefit from reviewing how their policies are structured, funded, and performing.

For investment-oriented policies, the review should consider questions such as:

• Is the policy being funded as efficiently as originally intended?

• Is unnecessary death benefit creating additional insurance costs?

• Could a newer product provide better economics or greater investment flexibility?

• Is the policy approaching its MEC funding limits?

• Could future changes to the policy affect its tax-compliance calculations?

• Does the existing policy still fit the client's current investment, estate-planning, and liquidity objectives?

These questions become particularly important with sophisticated PPLI structures, where policy design, investment management, insurance costs, and tax compliance must all work together.

PPLI Requires More Than Selecting a Product

At TRC Financial, we view Private Placement Life Insurance as a planning strategy rather than simply a life insurance product. A successful PPLI structure requires coordination among the client, insurance carrier, investment advisor, tax and estate counsel, and life insurance specialist.

Our role includes evaluating life insurance carrier and product structures, designing efficient funding, managing the life insurance and MEC limits, coordinating underwriting, reviewing investment options, and continuing to monitor the policy after it is placed.

The 2020 changes to Section 7702 created one of the more favorable environments in decades for investment-oriented life insurance. The rules expected to take effect in 2028 could partially reduce that advantage for newly issued policies by lowering the amount of premium that can efficiently be contributed relative to the required death benefit.

For most traditional protection-oriented life insurance, this may not materially change the planning decision. But for affluent families, investors, and businesses considering Private Placement Life Insurance or another maximum-funded strategies, the difference can matter.

If PPLI is already part of your planning conversation, now is an appropriate time to evaluate the structure rather than waiting until the end of 2027. TRC Financial can model the current funding limits, evaluate available PPLI structures, and help determine whether acting before the Section 7702 changes makes sense for your specific circumstances.

Investments in securities involve risks, including the possible loss of principal. When redeemed, shares may be worth more or less than their original value. Investors should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.

Private Placement Life Insurance is an unregistered securities product and is not subject to the same regulatory requirements as registered variable products. As such, Private Placement Life Insurance (or Annuities) should only be presented to accredited investors or qualified purchasers as described by the Securities Act of 1933.

Alternative investments, such as hedge funds within private placement life insurance, involve risks that may not be suitable for all investors. These risks include (but are not limited to) the possibility that the investment may not be liquid, principal return, and/or interest rate risk. Higher fees associated with alternative investments may offset any potential gains. Investors should consider the tax consequences, costs and fees associated with these products before investing.

Investors should consider the investment objectives and horizons, income tax brackets, risks, charges, and expenses of any variable product carefully before investing. This and other important information about the investment company is contained in each fund’s offering memorandum. Please read it carefully before you invest.

Market risk can be hedged through various means but it cannot be entirely eliminated. The hypothetical returns shared here are not guaranteed, involve risk, including possible loss of principal.

Neither TRC Financial or M Financial are authorized to give tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

An insurance contract’s financial guarantees are subject to the claims-paying ability of the issuing insurance company. Loans or withdrawals from your policy may impact your policy including your future death benefits. Please review your policy contract before taking loans or withdrawals from your cash value. Cash values and death benefits may vary based on the policy you purchased. Please consult your full policy illustration at the time of purchase. Cash value accumulation is determined by the policy contract and is not always guaranteed.