Understanding the Unique Wealth Management Options Using Private Placement Life Insurance


The growing shift in the financial industry from a sales and product-oriented practice to a holistic financial planning and retirement profession has forced advisors to consider investment vehicles in new ways. They need to consider what an investment vehicle can do in a unique way – what is its context and its maximum contribution to an overall financial plan? Insurance, for example, traditionally viewed by many as a risk product, is also being redesigned and strategically redeployed as a tool for wealth management and investment, especially in areas such as annuities and insurance. -life by private placement (PPLI) for ultra-high net-value (UHNW) clients.

To better understand the unique place that PPLI can occupy in the wealth management process, we spoke with members of the Institute Tommy mayes, president and Alan jahde, Founder and CEO of Investors Preferred, a tailor-made operator of private placement solutions to support advisors who deliver sophisticated financial planning and wealth preservation planning. Investors Preferred was named one of the fastest growing life insurers in 2020 by Life Annuity Specialist. This may be a particularly good time in the evolution of the financial services profession to re-examine specialized financial tools and approaches for UHNW family wealth, as a lack of awareness or understanding will place advisers in very little position. competitive.

How has the use of PPLI for heritage preservation planning changed over the years?

The PPLI as an investment and death benefit product has evolved since the early 1990s. In the beginning, only a few hedge funds were available as a PPLI policy investment choice for policyowner allocations, and these hedge funds were dedicated insurance funds (IDF) placed on insurance company platforms. A wider selection of IDFs has since increased allocation choices.

Investment choices have grown significantly due to the evolution of adding Separately Managed Accounts (SMA) to some insurance company platforms. Over the past 5 years, Investors Preferred has pioneered the concept of a unmixed SMA which uses professional RIA investment advisers with appointed custodians such as Fidelity or Schwab.

Can you explain in more detail the level of investment control and flexibility available within a PPLI envelope?

Investment flexibility is available, but investor control doctrine requires that the segregated accounts, which offer the most flexibility, be managed on a discretionary basis by a sub-advisor retained by Investors Preferred on behalf of each policy. There are also a growing number of IDFs available for investment, as well as Variable Insurance Trusts (VITs) registered under the 1940 Act or variable insurance products.

These options can be selected by the policy owner, but our advice is to use a professional investment advisor to develop a tailor-made strategy best suited to the client and their specific situation. In practice, for larger UHNW cases, open architecture is a reality today.

Apart from the open architecture, what are the advantages of PPLI when it comes to retirement planning?

An important attribute of private placement is that one can achieve an efficient accumulation of tax-free assets over time, much like that available in defined contribution pension plans and IRAs. Plus, in retirement or whenever the policy owner wishes, they can withdraw funds tax-free for retirement. Alternatively, leaving the funds inside the non-MEC life insurance policy (modified endowment contract) would support a larger death benefit for the client’s family.

What does the customizable combination of bespoke insurance and bespoke investment management uniquely offer as a financial engineering tool that benefits UHNW clients?

The combination of low-cost or no-cost PPLI solutions offering an open architecture of choice and investment strategies managed by the investment advisor chosen by the client; gains from a non-taxable policy; and tax-free withdrawals (non-MEC life insurance policies) combine to create a highly efficient and tailor-made after-tax investment tool. Plus, there’s a death benefit! Some compare it to “a Roth IRA on steroids,” with contributions limited only by life insurance capacity.

PPLI policies further have a huge advantage over traditional retail life insurance in that PPLI is also a great investment tool. It offers great flexibility of benefits as life events arise, such as a divorce, business bankruptcy or when a business is sold. The tax-free accumulation of the PPLI accumulates, resulting in a much larger account accessible with no redemption fees. Thus, no money has been wasted on traditional life insurance policies which, even with many years, have accumulated little or no cash values ​​net of the premiums paid.

Can you share some brief case study examples that show how some advisors are using the unique PPLI benefits?

Business succession planning: Mr. Adams owns a 50/50 business with an outside partner, Mr. Smith. Both partners are around 60 years old and in good health. The total fair market value of the business is currently $ 50 million, but over the next 10 years, the business is expected to be worth $ 100 million. The partners and the business entity have entered into buy-sell agreements requiring $ 50 million in permanent life insurance death benefits over the lives of each partner to fund a buyout of the business upon the death of the first. partner. Normally, the parties would have used a traditional retail life insurance policy to fund the death benefit. But by using PPLI, parties pay less for death benefit coverage, invest the cash value tax-free proceeds, and increase the cash value of business-related policy loans, just to increase the benefit. death or as an investment tool. Being an excellent investment tool, PPLI has a huge advantage over traditional retail life insurance in the accelerated tax-free growth of account value. Years later, if the buy-sell agreement is no longer relevant, money may have been wasted on traditional life insurance policies which, even after many years, have accumulated little or no of net cash values ​​in excess of the premiums paid.

Inheritance equalizer: The parents of three children, when they last died, want to bequeath the family business, worth around $ 35 million, to their child # 1 who works in the business. Yet they wish to make equal bequests to their two other children. To do this, they create and fund an Irrevocable Life Insurance Trust (ILIT), to acquire two PPLI policies with $ 35 million in death benefit each and designate children # 2 and # 3 as equal beneficiaries, 50/50 revocable policy from each. Politics. When parents die, child # 1 receives the family business worth $ 35 million according to parents’ estate planning documents, with children # 2 and 3 also each receiving $ 35 million in cash. PPLI / ILIT policies as free death benefits. inheritance and income tax. Prior to death, the cash value of the PPLI policy may be allocated by the ILIT Trustee to a well-managed diversified SMA portfolio at a branded custodian, alternatives or IDF hedge funds, growing within PPLI policies on a tax basis. -deferred base. The remaining property of the parents is available for other bequests to the children net of inheritance taxes, or for charitable bequests.

How do you partner with advisors to best deploy this wealth management tool for their clients?

We introduce and educate wealth advisers about the subject and flexibility of the PPLI as an investment tool, as well as how to use the death benefit. We then show them some examples of how they can manage money using a non-combined deposit account with their preferred custodian. All of these attributes add up to a great wealth management tool that is 7702 compliant (the tax code that governs private placement is in IRC 7702).

Once the RIA Wealth Advisor is comfortable with the planning product and applications, they feel more comfortable discussing concepts with their UHNW clients who appreciate being presented with new planning options. tailor-made heritage.

Do you have any other ideas or recommendations that you would like to share with the advisors?

We would like to invite advisors to learn more about PPLI as a valuable UHNW wealth management tool. Our firm offers a wide variety of educational resources and tax documents created in-house and generated by third parties, in addition to providing counseling orientation that lasts approximately one hour and is well received. Contact us to learn more about the resources available.

Institute for the Development of Innovation is an education and business development catalyst for growth-oriented financial advisors and financial services firms committed to leading their businesses in an operating environment of accelerating business and cultural change. We position our members with the resources of continuous innovation and best practices necessary to drive and facilitate their next generation growth, differentiation, and unique customer / community engagement strategies. The institute was launched with the support and foresight of our founding sponsors – Ultimus Fund Solutions, NASDAQ, Pershing, Fidelity, Voya Financial and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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