Tax-Efficient Access to Alternative Investments: IDF Basics

Do you advise the most affluent investors?

Do your clients invest in alternative investments tax-efficiently?

Insurance Dedicated Funds (IDFs) provide affluent investors with tax-efficient access to a diverse universe of private funds and alternative strategies.

What is an Insurance Dedicated Fund (IDF)?

An IDF is an investment vehicle structured as a separate legal entity attached to, but distinct from, the life insurance company’s segregated asset account, that are only open for direct investments from insurance companies. Individual investors can access IDFs through Private Placement Life Insurance (PPLI) and Private Placement Variable Annuity (PPVA) policies. IDFs within PPLI/PPVA policies allow policyowners to access alternative strategies and compound income and growth on a tax-deferred basis. IDFs are found on an insurance carrier’s private placement life insurance and variable annuity (PPLI/PPVA) platforms. 

In addition, PPLI policyowners can provide a tax-free insurance benefit to heirs. PPVA owners can bequest their contract value to a charity tax-free. (PPVA earnings are otherwise taxed as ordinary income when inherited.)

Access to IDFs

IDFs are available to PPLI and PPVA policyowners with investable assets of at least $5 million. The minimum cumulative deposit is $1 million, generally sequenced over 4-6 years. PPLI and PPVA vehicles are available through select insurance companies and each carrier offers a menu of IDFs approved on its platform. The number of IDFs available on insurance company platforms continues to grow. There is currently a robust group of 600 IDFs, including approximately 400 registered funds and 200 non-registered funds.¹ Policyowners have complete discretion to allocate and reallocate among these investment vehicles (subject to underlying fund restrictions) without tax consequences. These investment options are structured specifically to meet stringent tax regulations required for IDFs.

Investors typically work with a specialized insurance broker to implement a PPLI or PPVA policy, and with their wealth advisor to determine the investment allocation among a complement of IDFs that meet their specific goals and objectives.

Tax-Deferred Growth for Private Alternatives

IDFs are designed for investors who would like to grow their assets on a tax-deferred basis by investing in a portfolio of private alternative strategies. PPLI and PPVA policyowners can allocate to the IDFs available on their insurance company platforms. 

Most affluent investors considering PPLI or PPVA are seeking to enhance the net after-tax return of alternative asset class investments and optimize the after-tax performance of trust assets for future generations.

Access to a Unique Investment Fund Universe

IDFs provide a means to tax-efficiently diversify affluent client portfolios across a range of alternative investments. IDFs give investors access to a universe of over 200 private alternative fund strategies² that can help improve portfolio diversification and risk-adjusted returns.

IDF funds encompass a wide range of investment strategies and asset classes:

Compound Wealth Tax-Efficiently

IDFs provided potential tax-deferred growth for your clients and their heirs through the differentiated return streams of alternative strategies within private placement life insurance and variable annuities.

These tax benefits enable client portfolios to compound at higher after-tax rates of return, without the tax burden of ongoing Federal, state, and local taxes.

Note that implementing a PPLI or PPVA policy can be highly technical, requiring the expertise of an educated advisor.

Provide Your Clients with Tax-Efficient Access to a World of Alternatives

Through IDFs, you can provide your affluent clients with a world of tax-efficient alternative investments yielding tax-deferred growth.

Learn More

To learn more, download our Advisors' Guide: “Tax-Efficient Access to Alternative Investments”

This article is not intended as tax, accounting, insurance, or legal advice. Investors must consult with their own qualified professional advisors about their particular circumstances and the suitability of any investment.

1. Aaron Abrahms and Michael Mingolleli, Jr., “Private Placement Life Insurance and RIAs,” Trusts & Estates, November 1, 2019.

2. Quarterly Update: Insurance Dedicated Fund Marketplace,” SALI Fund Services, period ended 12/31/2022.