A Powerful Accumulation Tool For The Ultra Wealthy

In the last few months I have been getting a lot of questions around Private Placement Life Insurance and Annuity (PPLI/PPVA) products. Specifically, people are looking closer at these products in light of the proposed and expected changes in the tax code. While I am far from a tax expert, I think it is safe to say that we should eventually expect an increase, especially for the wealthy and ultra high net worth individuals. How do these products potentially help, and what do they do? Here at The Leaders Group, we have an in-depth knowledge of insurance products, and PPLI is no exception. Some of the top salespeople in the country for these products call Leaders Group home. With this experience, I hope to help demystify these products a bit.

There are a lot of moving parts in a PPLI policy, and it is very easy to get into the weeds and get incredibly lost if you dive too deep too quickly. That said, on the surface, they work fundamentally similar to standard “shelf” life insurance and annuity contracts. Just like their standard issue cousins, PPLI and PPVA contracts are an efficient way to provide preferential tax treatment for a client. The insurance products still provide a tax-free death benefit and the annuity products are still tax deferred, with funds taxed at the client’s rate at the time of distribution. So far, so good. What separates PPLI products from the pack are the type of clients that make sense and the flexible nature of the underlying investments.

PPLI products are not for everyone. If you don’t have a client that has at least $5 million in the bank that they don’t need access to, you probably want to look elsewhere. For the life products (as opposed to annuities), there should also be a life insurance need because, even with the preferential tax treatment, there may be ways that are more cost effective for a client to invest their money. In some situations it may even make more sense when comparing the various fees for a client to stick with a standard life insurance product. From a sales perspective PPLI/PPVA products are traditionally utilized for high net worth individuals that are looking for a tax efficient way to grow their investment portfolio. The discussion is normally led from an investment standpoint, meaning it is much more crucial to know the specific manager/managers that the client uses or would like to use. Once you know this you can work in conjunction with the client and product sponsors on what the best investment structure is to fit the client’s needs.

There are two standard ways to structure investments inside of a PPLI/PPVA product. The first is more akin to standard VUL or even mutual funds where the manager has an investment strategy that they adhere to for all the clients. In the PPLI/PPVA world, this setup is called an IDF, or insurance dedicated fund. If a client does not have a specific manager in mind, or if the manager they want to work with is already set up as an IDF, this is an easy option as most, if not all, of the due diligence at the carrier level has already been completed. The alternative setup is called an SMA or separately managed account (some carriers have different wording, as I know at least one uses the MSA acronym). In this instance, the client can work with a manager of their choosing, even if the manager is not currently working in the PPLI/PPVA space. This also gives the manager greater flexibility, allowing them to manage each client account a little differently and closer to each client’s specific needs. With either an IDF or SMA the manager will need to determine whether they want to be set up directly with a specific carrier or if they would like to outsource the compliance and accounting to a third party platform like SALI or Spearhead. The most important thing to take note of in regards to the asset management is that the managers need to adhere to strict guidelines around investor control, and while they can work toward goals that the client has, the client cannot ultimately guide the specific investment decisions.

One of the greatest values of PPLI/PPVA products is the flexibility allowed for the customer, manager and advisor. The areas mentioned previously are some of the many possible levers that can be pulled for customization, with client cost being another major consideration. The carrier, manager and financial professional all have flexibility on their compensation. Not to mention the location where the client assets are domiciled (usually in a trust) also has an impact on the total cost. There tends to be a lot of policies in places like Alaska, South Dakota, Nevada or other states where premium taxes are low. All of these are things that should be taken into consideration and, luckily, the various carriers can help you navigate all of the potential pitfalls.

In a nutshell, PPLI/PPVA products are for high net worth individuals with plenty of disposable cash that they want to see grow in a tax advantaged fashion. If you are familiar with standard insurance and annuity sales concepts, many of the implications of PPLI/PPVA are similar. The flexibility and customization that comes with these products are a big piece of what sets them apart and where it is easy to get overwhelmed if you don’t have the experience. Luckily our team here at Leaders, including some gracious advisors in the space, and our carrier partners are all here to help if an opportunity comes up. The products are definitely not for everyone, but can be a good tool to have in your arsenal if you are working in the ultra high net worth space.

Sean Wickersham is the president of The Leaders Group (TLG). He has been with TLG since 2008 and has more than 16 years of experience in the financial services industry. Wickersham’s primary responsibilities include corporate management oversight and planning, and development and execution of marketing initiatives.

Since 2013, Wickersham has been heading the marketing department, helping steer the direction of the team and has had an active role in the development of the various communications, the formulation and rollout of Starlight Portfolios and the creation of the LEADERSlink system. He has also helped with the rebranding and market awareness efforts.

Founded in 1994 by the late Dave Wickersham, The Leaders Group, Inc., is a national, independent broker-dealer. The Leaders Group’s mission is to provide extraordinary service, expertise, and flexibility to financial professionals, wholesale organizations and industry partners. For more information, visit www.leadersgroup.net.

Wickersham can be reached at The Leaders Group, 26 West Dry Creek Circle, Suite 800, Littleton, CO 80120.