Senator Wyden Introduces Bill on Taxation on Private Placement Life Insurance and Annuity Contracts

On April 13, 2026, Senate Finance Committee ranking member Ron Wyden, Democrat of Oregon, introduced legislation known as the Protecting Proper Life Insurance from Abuse Act (PPLI Abuse Act). If passed in its current form, the PPLI Abuse Act could change the tax treatment of certain targeted policies for holders and beneficiaries of variable life insurance and annuity products as well as the insurance companies that issue or reinsure such products. The following discussion identifies aspects of the PPLI Abuse Act most significant for insurance industry stakeholders.    

• Background. Under a variable life insurance policy or variable annuity policy (each a “variable product”), a policyholder’s death benefit (in the case of life insurance) or account value (in the case of an annuity) is determined, at least in part, by the investment performance of assets held in a segregated asset account of an insurance company. Section¹ 817 of the U.S. Internal Revenue Code of 1986, as amended (the Code), requires segregated account investments that support variable products to be diversified and treats the insurance company (rather than the policyholder) as the owner of such investments for tax purposes. Administrative guidance and case law also prohibit “investor control” of investment decisions within segregated asset accounts, but such guidance and case law generally allow policyholders to choose among general investment strategies when allocating their premiums so long as specific investment decisions remain with the insurance company or an independent investment adviser. Otherwise, the policyholder (rather than the insurance company) will be treated as the owner of the assets in the segregated account for tax purposes.

  Sen. Wyden has been focused on the taxation of variable products for several years, in particular variable products marketed to high-net-worth individuals who, due to their “accredited investor” or similar status, purchase the policies in exempt offerings under applicable securities laws. Senator Wyden previously led an 18-month investigation into these products and published a comprehensive report summarizing his findings in February 2024. Subsequently, in December 2024, he published a discussion draft of legislation that served as a precursor to the current proposed PPLI Abuse Act. 
  

• Scope of the PPLI Abuse Act. The PPLI Abuse Act creates a new Section 7702C(a) providing that a variable product that is an “applicable private placement contract” (APPC) will not be treated as insurance or an annuity for purposes of the Code. An APPC is defined to include certain “private placement contracts” (PPC). For these purposes, a PPC includes any variable product that requires the holder to make a representation that the holder has a specified minimum amount of income or assets, has completed a specified minimum level of education, or holds a specific license or credential, in each case, for purposes of obtaining a registration exemption under securities laws. A PPC will be treated as an APPC unless the assets in the segregated account supporting the PPC (i) support at least 25 PPCs and (ii) support each such PPC on a fully pro rata basis (i.e., the value of each PPC is supported by every asset in the account, with each asset supporting each PPC in the same proportion as every other asset supports that PPC). For this purpose, an aggregation rule treats all PPCs held directly or indirectly by the same person or a related person as one PPC. A PPC that is considered an APPC retains such status in perpetuity. Finally, a PPC issued by a foreign insurance company to a U.S. person is generally considered a per se APPC.

  Comment: 

  • The APPC definition is notable for its breadth. It is not limited to individuals and their estate planning vehicles and seems broad enough to include any entity that acquires a variable product in a private placement. This means a vehicle organized to purchase, for example, “company-owned life insurance” in a private placement may fall within the scope of an APPC even though the policy was acquired for nontax reasons.
  • Several mechanical questions will need to be addressed to determine whether the segregated account assets prevent a PPC from obtaining APPC status. In addition, in the case of a policyholder who owns multiple PPCs issued by different insurance companies, it seems the aggregation rule will require cooperation from each insurance company to determine whether the assets in the segregated accounts support a sufficient number of policies on a pro rata basis. Finally, it is notable that the PPLI Abuse Act focuses on the number of PPCs supported by a segregated account and whether the assets within the segregated account support such PPCs on a pro rata basis, as opposed to the composition of investments within the segregated account. This may be an attempt to buttress existing diversification requirements under Section 817.
• Tax Consequences for Holders of an APPC. Under Section 7702C(d), the holder of an APPC is treated as the owner of the assets in the segregated account supporting the APPC. As such, the holder is subject to tax on a current basis with respect to the segregated account assets regardless of whether cash is distributed. For this purpose, the character of the underlying income items (e.g., capital or ordinary) flows through to the holder, but the holder is not permitted to deduct certain fees (e.g., mortality charges) attributable to the APPC. In addition, any distribution under the APPC (including a death benefit, loan proceeds, annuity payment, or withdrawal) is generally included in gross income as ordinary income to the extent that such distribution, when aggregated with all prior distributions under the contract (whether or not made to the same taxpayer), exceeds the applicable adjusted basis in the contract (which generally equals the amount of premiums paid, increased by the amount of net income previously taken into account and decreased by the amount of deductions for net losses allowed, in each case, with respect to any person). Finally, if a PPC becomes an APPC in a taxable year subsequent to the taxable year that the PPC was issued, the holder is required to include the net income attributable to the segregated account assets in prior taxable years.
  
  Comment: Under the foregoing rules, holders of APPCs would, among other consequences, be denied the tax-deferred “inside buildup” commonly associated with traditional life insurance and annuity products. 

• Tax Consequences for Insurance Companies That Issue an APPC. Under Section 7702C(e), an insurance company that issues an APPC cannot treat the corresponding reserve as a “life insurance reserve” for purposes of the Code and must generally account for premiums, expenses, and fees attributable to the APPC on an accrual basis. As a result, it may be necessary to include premiums attributable to the APPC in income, but the insurance company loses the benefit of an immediate deduction when the reserves are established. The reserves also do not count favorably toward whether the insurance company is a “life insurance company” for income tax purposes. The foregoing rules also apply to reinsurers of mortality risk associated with an APPC. Finally, premiums paid to a foreign issuer or foreign reinsurer of an APPC continue to be subject to the federal excise tax (FET) under Section 4371 of the Code.
  
  Comment: The proposed tax accounting principles for APPCs are a significant deviation from the tax accounting principles that apply to non-APPCs. Insurance companies that issue APPCs may also be subject to tax accounting principles that are materially different than the statutory accounting principles that apply to such contracts. In addition, reinsurers may need to consider the potential APPC status of variable products that they reinsure. Finally, the continued application of FET is an exception to the general rule of the PPLI Abuse Act that APPCs are not treated as insurance or annuity contracts for tax purposes. 
• Reporting Obligations. The PPLI Abuse Act imposes significant reporting obligations on companies that issue or reinsure APPCs (referred to as “reporting issuers”). Reporting issuers need to submit initial returns and annual returns to the IRS with respect to each APPC. The initial return is due 30 days after the later of (i) the date that is 180 days after the PPLI Abuse Act is enacted or (ii) the date that the PPC first became an APPC. The returns must generally include identifying information for the reporting issuer, identifying information for the APPC policyholder, identifying information for persons that receive distributions under the APPC (e.g., death benefits or loan proceeds), the amount of net income or net loss with respect to the APPC, the amount of distributions under the APPC, and premiums or other payments pursuant to a reinsurance agreement involving an APPC. A reporting issuer also needs to provide a statement with similar information to the holder or beneficiary of an APPC. A reporting issuer that fails to file the initial return would be subject to a penalty of $1 million plus an additional $1 million for each 30-day period that the failure continues uncorrected. A noncompliant reporting issuer could also be required to disclose the penalty to its insurance regulator and, in the case of such a reporting issuer that is publicly traded, in its financial statements.

  In addition, the PPLI Abuse Act would amend the provisions of the Code implementing the Foreign Account Tax Compliance Act (FATCA) to (i) treat any entity that holds itself out as a life insurance company as a “financial institution,” (ii) disregard any election under Section 953(d) of the Code in determining whether an entity is a “foreign financial institution,” and (iii) treat foreign-issued APPCs (as well as the segregated asset accounts supporting them) as “financial accounts,” in each case, for FATCA purposes.

  Comment: It is notable that the reporting obligations apply to reinsurers as well. In the case of indemnity reinsurance, where the policyholder remains in privity with the ceding company that issued the underlying APPC, a reinsurer may be surprised to learn that reinsuring the APPC creates additional reporting obligations. The PPLI Abuse Act also does not appear to include a reporting exemption for foreign insurers or reinsurers that are not engaged in a U.S. trade or business.   

• Effective Date and Transition Rule. Section 7702C would generally apply to in-scope variable products issued before, on, or after the date that the PPLI Abuse Act is enacted. Taxpayers would have a 180-day transition period, however, to convert or exchange a covered variable product for a life insurance or annuity contract that does not qualify as an APPC. Alternatively, the APPC may be canceled or otherwise liquidated during the transition period.
  
  Comment: It will be necessary to confirm in subsequent guidance whether an exchange during the transition period is eligible for tax-free treatment under Section 1035 of the Code as the PPLI Abuse Act does not, as a general matter, treat an APPC as a life insurance or annuity contract for purposes of the Code.