By Dave Wickersham, CEO | July 1, 2019
Anyone that has been in the insurance industry for more than a few years has heard of private placement life insurance (PPLI), but almost no one has seen any cases or heard anything more than rumors about these cases until recently. As the largest distributor broker-dealer for variable life, we have always received a few questions about PPLI, but historically that was only a few calls each year. Within the last three years the number of calls and discussions about PPLI has increased to multiple discussions each week. I am asked regularly: “What is it?” “Why is there so much interest?” “What does the market look like?” and “How can I get involved?”
The first question is fairly straight-forward. Private placement life insurance and annuities are insurance products designed to minimize the insurance costs and wrap around assets that are managed in a way specifically tailored to the individual owner of the policy. The cost of PPLI is more than PPVA because of the COI and actuarial costs associated with life insurance and not annuities. However, PPLI is not taxed at death and, if structured correctly, there are no taxes on pre-death distributions. The death benefit of a PPVA is taxable on the excess of the original investment as ordinary income and pre-death distributions are taxed as ordinary income on a LIFO basis.
The interest comes from the fact that this is the market of the ultra-affluent. The minimum requirements for a “qualified purchaser” to be allowed to participate in PPLI is $5 million in liquid net worth. Obviously, this is the group of clients that everyone wants to work with. The advisors to these individuals have become much more aware of the existence of PPLI and are looking for outlets for these products. The minimum premium is typically $2 million, though that number could be lower in some special situations and most times the actual premium is higher. Since each policy is specific to the individual, there are many options for the underlying cash value investments.
The market is much different than traditional life insurance sales because the number of qualified purchasers is limited to a relatively few people and families. PPLI is an investment vehicle that gains many of its benefits from being a life insurance policy. While PPLI needs to be part of an overall life insurance plan, it does not work for many of the situations we normally address. Keep in mind that PPLI is primarily an investment product and most times the purchaser is not looking for, and may have no interest in, death benefit. The goal is usually to minimize the death benefit to reduce the COI and increase the investment returns. This is a market where many policies are sold as, or converted to, MECs because the tax deferral and tax-free death benefit are all that matters. An investment that is primarily growth-oriented and generates long-term capital gains is usually not ideal. The value of life insurance is elimination of the taxable income generated and thus a phenomenal way to create tax alpha. Tax-free compounding is still very desirable even with lower tax rates. There are also opportunities for corporate settings where the insured and corporation qualify. However, PPLI is not a good substitute for guaranteed death benefit products. PPVAs are typically sold if there are insurability issues or the beneficiary is a charitable trust, foundation or other charity where taxable death benefit is not a concern.
Having PPLI and PPVA products available are a necessity when working in the ultra-affluent market even if you never sell any. Many times, access to PPLI is a door opener with a family, office or estate attorney specializing in this market even though the real client need may be life insurance where the sales are traditional products. To get involved in PPLI or PPVA sales, you need to have an insurance license with variable authority, a series 6 or 7 and be registered with a B/D that is approved to sell PPVI by FINRA. The best way to learn about the products is to reach out to the insurance companies that issue the products and get their input. There are some companies that exclusively sell private placement products, like Investors Preferred Life, Lombard International and Crown Global. There are also companies that have a private placement team like Prudential and Zurich and many traditional life companies have specialized private placement products designed for specific purposes. Remember that this is an investment sale always and the insurance benefits are only what makes it work, not the primary interest of the buyers.
Last, but not least, is compensation! As I said before, private placement products are designed to minimize costs and the big difference is the compensation. Almost all of the compensation is negotiable with the client and can include AUM fees, placement fees or a combination of both. AUM fees can be paid directly from the asset manager if you have a Series 65 and are registered with an RIA or can be added to the insurance cost and paid to your B/D. These fees can run from a few basis points to nearly one percent and are typically recurring as long as the policy is in effect. Placement fees can run from 25 basis points (.25 percent) to as much as two percent of premiums paid. These fees are paid to your broker-dealer. Because of underwriting and the complexity of the sale (the process to get a policy issued is usually long) it is important that you understand the compensation structure at the beginning. Since the fees typically run for the life of the insured, you can make a lucrative recurring income only if you make it an ongoing part of you practice. If you are contemplating selling a single case, you will probably never make enough to justify the time and effort.
By having PPLI in your available products you can gain access to the ultra-affluent market through relationships with RIAs that cater to them, attorneys, accountants and family offices. This market is here to stay, and without having knowledge about it you will have less access and may miss out on the life insurance needs and opportunities that are significant in this market.
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