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Private placement life insurance A way to preserve wealth
PPLI is a tool for wealthy families to achieve tax-free investment growth and protection.
By Michael Malloy
Like the caterpillar turns into a butterfly, the recharacterizing of assets inside a private placement life insurance policy becomes transformational as well. Once assets are placed inside the PPLI asset structure, these assets take on the six principles of expanded worldwide planning: privacy, asset protection, succession planning, tax shield, compliance simplification and trust substitute.
A recent Bloomberg article states, “Athletes, celebrities, and family offices are embracing private placement life insurance, or PPLI, as a way to preserve wealth for their heirs. It’s a strategy that’s perfectly legal and has existed for decades.”
So why is it not more commonly used? Advisors tend to use the tools that they are familiar with. PPLI is not taught in law schools, so attorneys and other tax advisors must find it in the midst of their practices. PPLI is also not well known by most insurance agents. To truly appreciate what PPLI can accomplish for wealthy clients, you first must forget everything you currently know about life insurance. Yes, PPLI is life insurance, but it is radically different in both cost and benefits.
Within a PPLI structure
All cash value growth grows tax-deferred and is paid out as a tax-free death benefit. No income taxes or capital gains tax is due. Clients have the ability to access the cash value through tax-free loans, while their assets are protected and private. PPLI also offers limited reporting, the ability to avoid estate taxes and no surrender charges.
An outstanding singular feature that catapults PPLI above any other life insurance policy is that all asset classes can be placed in a policy, including:
» Real estate/physical assets. » Hedge funds/alternative asset classes. » Private equity. » Intellectual property. » Art. » Yachts and private jets. » Alternative currency denominations.
For many multinational clients, expanded worldwide planning using PPLI is a streamlined asset structure for wealthy clients throughout the world. It is a welldesigned asset structure that is implemented successfully to achieve the aims of privacy, asset protection and tax reduction.
It is a type of financial architecture that uses laws, concepts and ideas and blends them with the family dynamic and country-specific challenges of each individual client.
Cost benefits
Depending on the assets inside the policy, the total fees for a PPLI are 1%-2% of the asset value within the policy. The cost of insurance charges is institutionally priced at the wholesale reinsurance company rates.
The death benefit is insured with these same reinsurance companies — companies such as Swiss Re and Munich Re with trillions of dollars in assets. To be eligible for a PPLI policy, one must generally be what the Securities and Exchange Commission terms a qualified purchaser, having not less than $5 million of investments. Most companies’ minimum premiums are also $5 million.
Privacy
Expanded worldwide planning (EWP) gives privacy and compliance with tax laws. It also enhances protection from data breach and strengthens family security. EWP allows for a tax-compliant system that still respects basic rights of privacy. EWP addresses the concerns of law firms and international planners about some aspects of the common reporting standard related to their clients’ privacy. EWP assists with families’ privacy and welfare by protecting their financial records and keeping them in compliance with tax regulations.
Asset protection
EWP protects assets with segregated account legislation by using the benefits
How private placement life insurance works
Privately placed life insurance is generally structured as a variable universal life insurance policy, meaning:
• Premiums are flexible. Policyholders can pay as much or as little premium as they like, whenever they like. • The cost of insurance is deducted from the cash value in the policy subaccounts each month or each year. • To keep the policy in force, the owner must pay enough premium to maintain enough cash value to cover the cost of insurance. • If the cash value reaches zero, the policy will lapse.
The typical PPLI candidate or family has:
• A high net worth • The ability to fund $1 million or more in annual premiums for at least several years — $3 million to $5 million is typical • A desire for hedge fund or alternative investment exposure • Highly tax-inefficient investments • High state and local income taxes in addition to federal. (Advisors should be alert to the effect of any state premium taxes on the strategy.) • A desire to shelter assets from creditors
Source: Maxime Croll, ValuePenguin
of life insurance. This structure uses asset protection laws in the jurisdiction of residence to shield these assets from creditors’ claims. A trust with its own asset protection provisions still can receive additional protection with the policy.
Succession planning
EWP includes transfers of assets without forced heirship rules directly to beneficiaries using a controlled and orderly plan. This element of EWP provides a wealth holder a method to enact an estate plan according to their wishes without complying with forced heirship rules in the home country. This plan must be coordinated with all the aspects of a properly structured PPLI policy together with other elements of a wealth owner’s financial and legal planning.
Tax shield
EWP adds tax deferral, income, estate tax benefits and dynasty tax planning opportunities. Assets held in a life insurance contract are considered tax-deferred in most jurisdictions throughout the world. Likewise, PPLI policies that are properly constructed shield the assets from all taxes. In most cases, upon the death of the insured, benefits are paid as a tax-free death benefit.
Compliance simplifier
EWP adds ease of reporting to tax authorities and administration of assets as well as including commercial substance to structures. In addition, the insurance company is considered the beneficial owner of the assets. This approach greatly simplifies reporting obligations to tax authorities because assets in the policy are held in segregated accounts and can be spread over multiple jurisdictions worldwide.
Trust substitute
EWP creates a viable structure under specific insurance regulations for civil law jurisdictions. It also creates a new role for commercial trust companies. In most civil law jurisdictions, trusts are poorly acknowledged and trust law is not well developed. As a result, companies with foreign trusts in these civil law jurisdictions face obstacles.
A PPLI asset structure is arguably the most efficient structure available today for wealthy families who want a conservative and efficient structure to integrate tax-free investment growth, wealth transfer and asset protection.
Michael Malloy, CLU, TEP, RFC, is founder of Advanced Financial Solutions, New York. He may be contacted at michael.malloy@ innfeedback.com.
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MYGAs drive strong 2Q sales, Wink reports
Total second-quarter sales for all deferred annuities were $72.8 billion, an increase of 21.9% when compared with the previous quarter and an increase of more than 12.8% when compared with the same period last year, according to Wink’s Sales & Market Report.
Sales were powered by an 80% increase in multiyear guaranteed annuities, while variable product sales were down again.
All deferred annuities include the variable annuity, structured annuity, indexed annuity, traditional fixed annuity and Multi-year guaranteed annuity (MYGA) product lines. MYGA sales in the second quarter were $26.2 billion. Sales were up more than 79.9% when compared with the previous quarter and up 81.8% when compared with the same period last year. MYGAs have a fixed rate that is guaranteed for more than one year.
“Given the most recent rate environment, I project that we can count on
next quarter’s MYGA sales being significant as well,” said Sheryl Moore, CEO of both Wink Inc. and Moore Market Intelligence.
Meanwhile, variable annuity sales in the second quarter were $15.9 billion, down 13.9% as compared with the previous quarter and down more than 30.8% as compared with the same period last year.
REGULATORS PONDER NEW FORFEITURE RULES FOR INDEXLINKED ANNUITIES
Registered index-linked annuities have been burning up sales charts for a few years now. But regulators are not convinced the index-linked products are true variable annuities, as they have been classified.
The index-linked products do not fit into Model 250, which includes the VA nonforfeiture rules that determine how much money a contract holder can get back if they give up the annuity.
The new index-linked annuities do not fit Model 250 because their daily values are not based on the value of units of a separate account. Rather, the daily values are based on formulas set forth in the contract.
A National Association of Insurance Commissioners’ subgroup developed an actuarial guideline for technical changes to values that would bring the products in line with traditional VAs.
The subgroup is on its fifth exposure and nearing completion on the rule updates.
EX-BROKER FOUND LIABLE IN ANNUITY FRAUD CASE
An ex-broker who allegedly scammed federal employees into purchasing variable annuities will pay the price for the bad advice.
The U.S. District Court for the Northern District of Georgia awarded the SEC a final
judgment against Jonathan Dax Cooke, accused of fraudulently persuading hundreds of current and former federal employees to liquidate their Thrift Savings Plan accounts in order to purchase variable annuities.
QUOTABLE
Most millennials and Gen-Xers are planning at least one major life change in the next two years.”
— Tim Gerend, executive vice president and chief distribution officer, Northwestern Mutual
The variable annuities charged significantly higher fees and provided Cooke with substantial commissions. The three other individual defendants named in the litigation settled before trial.
GLOBAL ATLANTIC INKS $10B ANNUITY REINSURANCE DEAL WITH EQUITABLE
Global Atlantic Financial Group struck a deal with Equitable Financial Life Insurance Co. to reinsure a portion of its group retirement annuities. The business Global Atlantic will reinsure is worth $10 billion in general account and separate account value.
Under the terms of the agreement,
Equitable will transfer approximately $3 billion in general account assets under management to Global Atlantic subsidiary First Allmerica Financial Life
Insurance Co. Equitable will retain servicing and administration of the policies and separate account funds, which will be ceded on a modified coinsurance basis. The deal is expected to close during the fourth quarter, subject to satisfaction or waiver of customary closing conditions, including receipt of regulatory approvals.
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