In the last installment I pointed out with pride the benefits of knowing “squat” at least in regard to the weight room. Fortunately, I have avoided serious injury in my lifting career. In fact, Aunt Bea has probably had more joint injuries than I have had. Mrs. Nowotny has never been a fan of the Iron Game and routinely asked me why I couldn’t develop an interest in golf, tennis, or sailing, in that order.

These days I have a small but valuable collection of kettlebells particularly in the Pandemic when everyone wanted to equip a home gym. My new fitness model is something I call “Compound Fitness” which like compound interest accumulates benefits over time. I do a little bit of lifting every day along with some anaerobic cardio using the Concept 2 rower, ski erg, and bike. I feed my competitive inclination by posting my times. I am still trying to be a “contender.”

PPLI is a form of variable universal life insurance. The policy is strictly available for accredited investors and qualified purchasers as defined under federal securities law. The policy is institutionally priced and is virtually a “no load” product. The insurer provides the policyholder with the ability for the policyholder to customize the investment options within the policy. The range of investment options can include a customized fund managed by the client’s existing investment advisor as well as a range of asset classes including hedge funds, real estate, and private equity.

This is the second installment of a series in the new year to help financial advisors to build and retain a clientele and increase assets under management with cutting-edge ideas. Each article is designed to bring a creative planning idea that helps the financial advisor to demonstrate value while implementing solutions with financial products.

Private Placement Life Insurance (aka PPLI)

PPLI is a form of variable universal life insurance. The policy is strictly available for accredited investors and qualified purchasers as defined under federal securities law. The policy is institutionally priced and is virtually a “no load” product. The insurer provides the policyholder with the ability for the policyholder to customize the investment options within the policy. The range of investment options can include a customized fund managed by the client’s existing investment advisor as well as a range of asset classes including hedge funds, real estate, and private equity.

The assets supporting the policy cash value are separate or segregated from the life insurer’s general account asset and its creditors. The policyholder can select these funds within the life insurance policy with the carrier’s fund election form.

Private Placement Variable Deferred Annuities (aka PPVA)

A deferred annuity is a deferral of the promise to make a series of payments to the policyholder. The deferral may be set for a fixed period. Many contracts list a maximum age of 85 or 90 for the deferral period. The account value in a “fixed” annuity is based upon the crediting rate based upon the insurer’s investment performance on general account assets. Most insurance general account investments are in investment grade bonds.

In a variable annuity the investment performance is based upon the investment performance of separate account funds. These funds are segregated from the insurer’s general account assets. Traditionally, these funds are mutual fund clones or sub-accounts managed by investment management firms in the mutual fund industry. The investment performance for these accounts is a direct pass-through to the policyholder.

The private placement version of this product is for accredited investors and qualified purchasers based upon the definition under federal securities law. Like PPLI, the products are institutionally priced with no surrender charges. The investment options include hedge fund, private equity, and real estate options as well as traditional mutual fund-like options.

Tax Advantages of Life Insurance and Annuities

The tax advantages of life insurance are well known. Life insurance enjoys the tax-free buildup of the policy cash value, tax-free death benefit and the ability to take tax-free distributions from the policy during lifetime through a partial surrender of the cash value and low-cost policy loans. Said another way, the money grows tax-free; you take it out during your lifetime tax-free and when you die it is tax-free.

Deferred annuities provide for tax deferral. At the death of the policyholder, the account value must be distributed to the beneficiaries within five years of the policyholder’s death unless the beneficiary is the policyholder’s spouse. In that case, the spouse is treated as the new owner and policy benefits may continue to be deferred until the spouse’s death.

Income taken “other than as an annuity” during the policyholder’s lifetime is treated as taxable income (at ordinary rates) to the extent of investment income within the policy. Income that is taken in the form of an annuity is partly taxable and partly treated as a return of principal based on a formula known as the exclusion ratio. The big point here is annuities are not as tax advantaged as life insurance.

So Where Do I Benefit?

The financial advisor has several paths of additional revenue by virtue of becoming involved in PPLI and PPVA. The registered investment advisor can become an investment manager managing the investment assets within the policy. In many cases, the Investment advisor will make allocations to other managers and strategies. The assets grow exponentially through the elimination of income taxation on investment income within the policy. All of this results in a larger amount of assets under management. Because life insurance assets are “sticky” assets, 3 these assets have a better chance of remaining with the financial advisor for the long-term horizon.

For the financial advisor who is still registered with FINRA and would like to sell life insurance, there is a solution. Several PPLI carriers, foreign and domestic, have adopted a reinsurance policy which utilizes permanent life insurance that is assigned to the life insurance in lieu of traditional reinsurance. This structure allows the financial advisor to sell and earn a first-year commission along with renewals for the placement of this traditional permanent coverage. The size of the face amount and average of the typical insured results in a large first year commission. This policy placement can be accomplished without the need of a selling agreement between broker-dealers or the need of signing a selling agreement with an offshore life insurer. Hence, the financial advisor can stand clear of any compliance issues.

Summary

At the end of the day, the PPLI is a creative financial planning and tax solution. The financial advisor has the ability to manage investment assets with greater tax efficiency inside of PPLI or PPVA contracts. The client benefits through the tax-free growth of his/her investment assets and the ability to distribute funds on a tax-free basis. The death benefit is income tax-free and can be structured to avoid estate taxes. The policy is generally exempt from the claims of the policyholder’s creditors. My question to you is “What other investment product or structure offers these benefits and why aren’t you selling more of it?” Operators are waiting to take your call!