The growing financial industry shift from a sales and product oriented practice to a holistic financial and retirement planning profession has forced advisors to think about investment vehicles in new ways. They need to consider what an investment vehicle can uniquely do – what is its context and maximal contribution to a comprehensive financial plan? Insurance, for example, traditionally seen by many as only a risk product is also being rethought and strategically redeployed as a wealth management and investment-oriented tool, especially in areas like annuities and private placement life insurance (PPLI) for ultra-high-net-worth (UHNW) clients.
To gain a better understanding of the unique place PPLI can occupy in the wealth management process, we talked to Institute members Tommy Mayes, President, and Alan Jahde, Founder and CEO, of Investors Preferred, a bespoke carrier of private placement solutions to support advisors who offer 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 advisors in a seriously uncompetitive situation.
How has using PPLI for wealth preservation planning changed over the years?
PPLI as an investment and death benefit product has been evolving since the early 1990s. In the early days, only a few hedge funds were available to choose from as an offered PPLI policy investment choice for policy owner allocations, and these hedge funds were in insurance dedicated funds (IDF) placed on insurance company platforms. A wider selection of IDFs since then have increased allocation choices.
The investment choices have developed dramatically because of the evolution of adding separately managed accounts (SMAs) to some insurance company platforms. In the last 5 years, Investors Preferred has pioneered the concept of a non-comingled SMA that utilize professional RIA investment advisors with named custodians such as Fidelity or Schwab.
Can you more fully explain the level of investment control and flexibility available inside a PPLI wrapper?
Investment flexibility is available, yet the Investor Control Doctrine demands that separate accounts, which offer the most flexibility, be discretionarily managed by a sub-advisor retained by Investors Preferred on behalf of each policy. There also is a growing body of IDFs available for investment, as well as 1940 Act registered variable insurance trusts (VIT) or variable insurance products.
These options can be selected by the policy owner, but our advice is to utilize a professional investment advisor to develop a bespoke strategy best suited for the client and their specific situation. As a practical matter, for larger UHNW cases, open architecture is a reality today.
Outside of open architecture, what are the retirement planning benefits of PPLI?
A significant attribute of private placement is that one can obtain efficient tax-free asset accumulation over time, much like that available in defined contribution retirement plans and IRAs. Additionally, upon retirement or whenever the policy owner choses, he or she may withdraw funds on a tax-free basis for retirement. Alternatively, by leaving the funds inside the non-MEC (modified endowment contract) life policy, it would support a larger death benefit for the client's family.
What does the customizable combination of bespoke insurance and bespoke investment management uniquely provide as a financial engineering tool that benefits UHNW clients?
The combination of low- or no-load, fee-based PPLI solutions offering an open architecture of investment choices and strategies run by a client’s chosen investment advisor; resultant tax-free policy earnings; and tax-free withdrawals (non-MEC life policies) collectively combine to create a very efficient and bespoke after-tax investment tool. Plus there is a death benefit! Some compare it to “a Roth IRA on steroids,” with contributions limited only by life insurance capacity.
PPLI policies additionally have a huge advantage over traditional retail life insurance in that PPLI is also an excellent investment tool. It provides great flexibility of benefits as life events occur, such as divorce, business failure, or when a business is sold. The PPLI tax-free buildup accumulates resulting in a much larger account accessible without surrender charges. So, no money has been wasted on traditional life policies that even with many years have accumulated little to no net cash surrender values of premiums paid.
Can you share a few brief examples of case studies that show how some advisers are employing the unique benefits PPLI?
Business succession planning – Mr. Adams owns a business 50/50 with an outside partner, Mr. Smith. Both partners are around age 60 and in good health. The total fair market value for the business is currently $50 million, but over the next 10 years, the value of the business is anticipated to appreciate to $100 million. The partners and the business entity have entered into Buy-Sell Agreements requiring $50 million of permanent life insurance death benefit on the life of each partner in order to fund a buyout of the business on the death of the first partner. Normally, the parties would have used a traditional retail life policy to fund the death benefit. But by using PPLI, the parties pay less for death benefit coverage, invest the proceeds of the cash value tax free, and grow the cash value for business related policy loans, to simply increase the death benefit, or as an investment tool. Being an excellent investment tool, PPLI has a huge advantage over traditional retail life insurance in the tax-free accelerated growth of the account value. Years later, if the Buy-Sell agreement is no longer relevant money may have been wasted on traditional life policies that, even after many years, have accumulated little or no net cash surrender values in excess of premiums paid.
Inheritance equalizer – Parents of three children, upon their last deaths, wish to leave the family business, worth approximately $35 million, to their Child No. 1 who is working in the business. Yet they wish to make equal bequests to their other two children. To accomplish such, they create and fund an Irrevocable Life Insurance Trust (ILIT), to acquire two PPLI policies with $35 million of death benefit each and designate Child No. 2 and No. 3 as equal, 50/50 revocable policy beneficiaries of each policy. Upon the deaths of the parents, Child No. 1 receives the family business worth $35 million pursuant to parents' estate planning documents, with Child Nos. 2 and 3 also each receiving $35 million in cash from the PPLI policies/ILIT as death benefits free of estate and income taxation. Prior to death, the cash value of the PPLI policy can be allocated by the ILIT trustee to a well-managed diversified SMA portfolio at a name-brand custodian, in alternatives, or in IDF hedge funds, growing inside the PPLI policies on a tax-deferred basis. The remaining assets of the parents are available for further bequests to the children net of estate taxes, or for charitable bequests.
How do you partner with advisors on how to best deploy this wealth management tool for their clients?
We introduce and educate wealth advisors on the topic and flexibility of PPLI as an investment tool, as well as how to utilize the death benefit. We then show them some examples on how they can manage the money utilizing a non-comingled custodial account at their favorite custodian. All of these attributes add up to very good wealth management tool that is 7702 compliant (the tax code that governs private placement is within IRC 7702).
Once the RIA wealth advisor becomes comfortable with the product and planning applications, they then feel more comfortable discussing the concepts with their UHNW clients who appreciate being offered new bespoke wealth planning options.
Any other thoughts or recommendations you would like to share with advisers?
We want to invite advisors to learn more about PPLI as a valuable UHNW wealth management tool. Our firm offers a wide variety of internally-created and third-party-generated educational resources and tax materials, plus we provide an advisor orientation that lasts about an hour and is well received. Contact us to learn more about the resources available.