By Alan Jahde, JD, LLM (taxation)
At Investors Preferred, while working with advisors of ultra-high-net-worth (UHNW) clients, we often hear comments of adversity toward the “i-word” (insurance).
Why would an UHNW individual or family decide to purchase a private placement insurance policy or annuity?
As with most investment structures, this is a solution for specific planning requirements. The short answer is private placement policies are cost-efficient and offer institutional pricing. Therefore, almost 100% of premium paid accrues to cash value in the early years. But, that’s just the high-level response; in this blog I’ll expound upon these important features, which make private placement insurance a valuable tool for wealth planning.
First, why is it called private placement? Answer: Because each contract is issued under its own private placement memorandum due to securities rules, and it is only offered privately to clients who are accredited investors and/or qualified purchasers.
Second, how can it be valuable for advisors working with UHNW clients? Conceptually, the structure of private placement life insurance (PPLI) and private placement variable annuity (PPVA) policies are an efficient investment tool first; the death benefit planning is a lesser, but still important, component. PPLI and PPVA policies can be used to achieve goals related to tax deferral, efficient wealth accumulation planning, retirement income, estate planning, and other sophisticated wealth planning.
Third, how can the investment component of the policy be managed? Three structures currently are available:
All three options provide a wide variety of investment choices to meet your client’s goals while providing an income-tax-free investment return. Additionally, Investors Preferred arguably offers one of the most robust investment selections in the industry.
With historically low tax rates and proposed tax changes, PPLI and PPVA policies have gained traction and interest in the UHNW community.
Unlike traditional policies, the goal of PPLI is to provide tax-efficient investment growth and flexibility by minimizing internal costs and providing varied investment options. The death benefit is as low as possible compared to the premiums paid, and advisors take little or no commissions. The internal charges are typically around 1%, meaning if you get an 8% return, 7% is credited to the account. Within the first year, assuming a positive investment outcome, most policies have a cash value that exceeds premiums paid.
PPVA has even less cost drag on investment performance than PPLI and is a more straightforward process for the client, without a need for medical underwriting. Contrary to common thought, PPVA policies can defer income taxes on earning of the cash value for generations.
Private placement insurance is an underutilized solution for UHNW clients. I hope we’ll continue to see a shift in perspective, from viewing insurance as a four-letter taboo word to recognizing its role in helping clients achieve their financial objectives. We’re happy to provide you with information regarding PPLI, PPVA, and the investments available; please reach out anytime.