Wealthy Americans Find Another Tax-Free Way to Invest

Ultrawealthy Americans are pouring billions of dollars into a once-quiet corner of the life-insurance industry in a bid to lower their taxes.

Against the backdrop of a yearslong bull market, many high-net-worth individuals have shifted their focus from asset allocation—what to invest in—to asset location—the most advantageous place to put an investment. That can often mean putting investments that generate a regular stream of interest income or short-term capital gains into a tax-free account, such as an IRA. But those limit contributions to only $7,500 a year.

Enter private-placement life insurance, a customizable insurance contract that allows unlimited investments to grow tax-free.

“It is a Roth IRA on steroids for people who can afford it and want to leave it to their heirs,” said Jim White, founder of Great Oak Wealth Management.

The policies have surged in popularity among wealthy individuals, who use them to invest in alternative assets such as hedge funds, private credit and private real estate. Such investments can come with higher returns—and hefty annual tax bills.

But there is a major catch. To comply with Internal Revenue Service rules, the investor must give up control of the assets within the policy. That means putting the money in a specialized private investment vehicle known as an insurance-dedicated fund or a separately managed account whose investments are sourced and overseen solely by their adviser.

This has deterred some wealthy clients who work in private equity and want to invest in their own funds or in those run by friends.

“You cannot call your adviser to say, ‘Hey, sell Apple and buy Google,’ ” said Michael Fontanini, senior vice president, advanced sales and design, at life-insurance network Lion Street. Policyholders also can’t set up a prearranged plan with their advisers regarding the underlying asset selection, he said.

The five biggest carriers, accounting for most of the market, had over $44 billion in assets under administration in such policies at the end of 2025, according to advisory firm Life Insurance Strategies Group.

Created in the early 1990s, private-placement life insurance takes advantage of tax-code provisions intended to encourage people to provide for their dependents using life insurance. The policies began gaining traction a little over a decade ago when wealth advisers realized they could manage—and charge fees on—the assets, which are essentially locked up for years.

Private-placement life insurance isn’t for everyone. Policyholders must be accredited investors—with at least $1 million in investible assets—or qualified purchasers—with at least $5 million.

Tom Callahan of BFA Family Offices said around a quarter of the ultra-high-net-worth families he advises either have policies in place or are considering them, and he expects that figure to rise. He is working with a private-equity executive who opened a policy almost three years ago. The executive expects to receive $30 million to $50 million in distributions from his firm’s funds over the next few years and wants to diversify by investing the cash into hedge funds, private credit and private real estate, managed by other firms.

The executive’s investments could one day be worth hundreds of millions of dollars, and he won’t have paid a dime in ordinary-income or capital-gains taxes on their growth. He can take withdrawals or loans against the policy’s cash value but generally doesn’t expect to tap the proceeds. When he dies those will go to beneficiaries income-tax-free in the form of a death benefit.

His policy is inside an irrevocable trust set up for his children—a structure often recommended by advisers—meaning it also wouldn’t be subject to estate taxes.

“It’s a way to create a tax-efficient wrapper around tax-inefficient investments,” said Callahan, who heads up BFA’s family wealth planning.

Assets within the policy must be diversified, generally with at least five assets. To maintain their tax-free status, policies must undergo quarterly tests for diversification and ongoing tests of investor control.

Some in Congress would like to see private-placement life insurance lose its tax-free status. Sen. Ron Wyden (D., Ore.) in April introduced legislation that would separate it from traditional life insurance, making its earnings and losses taxable to the policyholder as they are earned each year.

“We cannot have a bunch of ultrarich tax dodgers abusing its special tax treatment to set up tax-free hedge funds and shelter mountains of cash,” Wyden said in a press release announcing the legislation.

Offshore insurance carriers tend to be more aggressive. They have allowed people to hold business interests, yachts, artwork and bitcoin in private-placement life insurance policies, according to advisers who work with ultrawealthy clients abroad.

Fontanini of Lion Street says such transactions may not withstand IRS scrutiny.

“The juice isn’t worth the squeeze,” he said. “Just because someone says there’s a way you can do it, doesn’t mean it would pass the test.”