Private Placement Life Insurance: Another Tool in the Wealth Manager’s Toolbox
A hallmark of wealth management is the ability to integrate the disparate practice areas impacting clients’ financial lives into a cohesive plan aimed at assisting clients in working toward their financial goals and objectives. From asset management to estate planning and everything in between, a wealth manager is one who either provides for this integration in-house or coordinates complementary professionals into a network available to meet clients’ needs.
The wealth management model seems to be the preferred model sought out by high net worth clients. Their circumstances often push them into a realm of needing advice and counsel beyond the scope of traditional financial planning. This reality also highlights the need for specialized tools to help clients work toward their financial objectives. One such specialized tool is private placement life insurance (PPLI) — an offering that blends risk management and professional asset management.
Traditional cash value life insurance is most often used as part of a plan to mitigate a specific risk or set of risks facing a client. For example, it might be used to pay the final expenses of the decedent or to provide resources for the surviving spouse and family. PPLI is a specialized form of variable life insurance that is not registered with the U.S. Securities and Exchange Commission (SEC) and is available only to high net worth clients.
The purchaser of PPLI generally has two goals: meet the specific insurance need for death benefit protection, and accumulate assets.
The “private placement” component of PPLI refers to the investible savings portion of the policy. PPLI, like standard variable life insurance, allows for policy owners to make deliberate decisions regarding into which investment vehicles surplus capital will be allocated. Unlike its traditional counterpart, which allows the policy owner to select only those investment options that the insurance company makes available, PPLI can hold a variety of assets, such as stocks, bonds, hedge funds and other private equity investments with the insurer’s approval.
When fully compliant with all applicable tax laws, life insurance (including PPLI) receives advantageous tax treatment. While the assets remain within the life insurance wrapper, policy investments grow free of income tax on an annual basis and, with properly integrated estate planning, ultimately pass to beneficiaries free of income and estate tax at the insured’s death.
The compound effect of several features makes PPLI particularly well suited to helping high net worth clients work toward their risk management, investment and estate planning goals:
- Negotiated, and often reduced, fees.
- Advantageous income and estate tax treatment.
- Hyper-focus on accumulation and growth.
- Tax-free access to cash value accumulation during insured’s lifetime.
- Asset protection capabilities.
- Liquidity added to the estate at the insured’s death.
For individuals to purchase PPLI, they typically must be both an “accredited investor” and a “qualified purchaser” as defined by the SEC. To be labeled an accredited investor, one must earn at least $200,000 per year as well as have a net worth of at least $1 million. To be a qualified purchaser, the individual must medically qualify for life insurance by having a reasonable insurable risk profile.
Another attractive feature of PPLI is that it can be structured and routed through an offshore entity. This can provide additional benefits that a domestic policy may not be able to offer. Premium payments to offshore life insurance affiliates are not subject to U.S. state premium taxes, which generally range from 1 percent to 3 percent. There is also generally more investment flexibility with offshore entities due to the lack of state insurance and SEC and securities-law regulations. Finally, the inherent nature of offshore entities can provide an additional layer of asset protection.
Incorporating PPLI as a tool available to your clients within an integrated wealth management plan can legitimately allow investments to accumulate free of income taxes and pass to beneficiaries free of income and estate taxes, while remaining beyond the reach of creditors and providing a significant death benefit to heirs. However, just as it’s not prudent to use a hammer to drive a screw, you need to understand how this tool works to add value to your clients’ financial lives.
Edward R. Collins
Edward R. Collins, CFP, AAMS, RFC, is a founding partner and wealth advisor at Artisan Wealth Management, LLC. Contact him at 908-366-7630.
This article appeared in the November/December 2016 issue of New Jersey CPA magazine. Read the full issue.