Private Placement Life Insurance, referred to as PPLI, continues to get a substantial amount of attention. A Bloomberg article with an eyebrow raising title written by Alexis Leondis in September got a lot of agents and BGAs interested in PPLI. I certainly appreciate the product and its place on the shelf, it just happens to be an extremely complicated offering for anyone looking to market it for the first time. It is advisable to ease into this space, learn the accumulation sale if you are not already using it, and then align good partners for your PPLI offering. It is crucial to understand that PPLI is a solution that will only apply to a subset of the ultra-high-net-worth population. It is not something that can be mass marketed to your entire pool of agents or clients but rather something to be very selective about. A good approach is to market with a general accumulation VUL story and have several non-PPLI solutions you can turn to for customers who don’t fit the accredited investor/qualified purchaser level needed for PPLI. You also need to understand that you will likely need help due to the complex nature of the products. It takes a large degree of “teamwork” between the writing agent, general agent (if there is one), carrier, trust company, underlying investment manager, and the client’s attorneys, CPAs, and other agents of influence. That process can be somewhat like herding cats if you are not adequately prepared.
The first step is understanding what type of sale this is and how to communicate it. Private Placement VUL is an accumulation sale and not a protection or death benefit driven sale. The idea of private placement VUL is to place advanced money managers or hedge fund style investments either structured as an insurance dedicated fund (IDF) or separately managed account (SMA) within the tax-advantaged wrapper of life insurance to maximize accumulation and then distributions. If the customer can’t qualify for life insurance due to their health, doesn’t need a death benefit, or prefers an annuity structure, a PPVA structure may also be deployed. Over 80 percent of the VUL sales conducted outside of career agencies are protection-orientated sales, which tells me most people don’t market accumulation VUL proactively. PPLI requires a shift in that protection mindset. I would suggest that if you have never marketed accumulation or overfunded VUL before that you start with the standard retail products first and keep that PPLI opportunity in your back pocket. It is easier to lead with broad concepts than it is to start with a niche product like PPLI (shotgun vs. rifle).
Whether you are still working to become comfortable with the standard accumulation VUL story or are already well versed, there are “bridge products” to help you move towards PPLI. These would be executive VUL products, or single-life COLI type products that are more institutionally priced—high early cash value designs that can get you closer to a PPLI type of mindset. Accumulation sales are investment focused, so becoming familiar with what the agent uses for money managers or what type of investments the customer uses will go a long way in determining what VUL product aligns with their investment philosophy. With the recent changes to 7702, a greater percentage of premium dollars can be invested in the cash value, versus what is required for cost of insurance, which will enhance the attractiveness of the design. Change brought about with AG 49-A forced many carriers to integrate IUL sub-account options within the standard VUL chassis, which offers great downside protection options not previously available and isn’t a horrible option given how hot this stock market has become.
From the cost perspective, PPLI basically resembles retail VUL products without the large upfront commission expense components. There are typically premium based commission payments that drop off after the customer stops paying premiums. Usually, several million dollars in total premium over multiple years would be the minimum amount required for PPLI. The premium-based commissions are in the neighborhood of 50 basis points. There is also an asset-based commission that runs throughout the life of the policy, typically starting at 35 basis points for the first decade, then reducing every ten years or so, generally flattening at around 15 basis points for the remaining duration. The combination of the premium and asset-based commission payments would equal the agent compensation outside of anything that may be upfront. In many cases, a first-year placement fee can apply as well which varies widely (50 basis points to 300 basis points). Without any built-in BGA overrides, if there is a general agent involved, the agent and the BGA split these fees which are largely negotiated. Right now Prudential is one of the few carriers that has a built-in override for BGAs that is paid separate and aside from the policy itself and is asset-based, which makes things straightforward if you are acting in that capacity. PPLI is custom built and, with that in mind, these fees can vary substantially depending on the size of the case, the carrier, and parties involved in the sale. As you can tell, these types of sales have thinner margins than standard “street” products. PPLI is a sexy sale, and a wonderful product to be able to market, but unless you plan on lining up several of these each year to build a recurring stream of income, its biggest value for you may be as a door opener for discussions with larger offices and clients. In many cases, it may be more worthwhile to utilize the off-the-shelf VUL products to go after the “middle market” millionaires.
Private placement VUL requires a lot of teamwork. There are several PPLI carriers to choose from and you will need to start there. Build and develop a good relationship with two or three carriers because they will help you when it comes time to bring the appropriate parties together and put a nice presentation forth for a customer. The carriers we see often, in alphabetical order, are Crown Global, Investors Preferred Life (IPL), Lombard, Prudential, and Zurich. Working with the client’s attorneys, estate planners, or accountants will also be critical, and determining whether a trust company should be utilized, typically located in South Dakota, Delaware, or Alaska, to offer the most favorable premium tax. Identifying the investment manager or managers and helping them develop SMAs or IDFs for use within the insurance wrapper may also come into play, which the carriers can assist with along with other industry players such as SALI Fund Services or Spearhead Innovative Solutions. Agents will need a life insurance license, along with at least a FINRA Series 6 and Series 63, to offer this type of product. Not all broker-dealers allow PPLI, which is a regulation D product, and will have strict guidelines and restrictions associated with the marketing of such a product, so keep that in mind.
I think the recent focus on increased taxation has led to some enhanced promotion of private placement life insurance, which isn’t necessarily a bad thing if it is presented to the correct types of clients. I do think there is a risk of focusing too much on a solution which has application for a limited market. Some people I’ve talked to don’t believe the margins are worth the effort it takes with PPLI which is debatable. I think it would be better for the industry, and more people, to help those clients in the mass affluent segment, making $250,000 to $2,500,000 per year in income, let’s say, and offering them a solution instead of “elephant hunting.” The more standard accumulation story doesn’t appear to be widely told to any substantial degree and that is a shame. We can help a greater pool of customers that way and attempts to mass market PPLI, especially to clients outside of the ultra-high-net-worth market, may be clouding the waters.