Life Insurance Policy Reviews Are Critical

Private Placement Life Insurance & Annuity programs, commonly referred to as PPLI, have quickly become a favorite strategy among ultra-wealthy investors seeking greater tax efficiency within investment vehicles. It allows policyholders to combine the strength of premium investment products, like hedge funds or other alternatives, with the tax-free benefits of life insurance.

“This is a valuable product that people get excited about owning and tell their friends about,” Aaron Hodari, Managing Director at Schechter, recently told Bloomberg. “It’s an alternative investment that allows you to invest in hedge funds and defer or eliminate taxes.”

It’s estimated that clients put $3 billion into Private Placement products last year alone, with Lombard International, a Luxembourg, and Philadelphia-based wealth manager bought by Blackstone LP in 2014, attracting most of that business; but they aren’t the only players. Wealth managers like Lombard rely on firms with complex insurance expertise – such as Schechter – to handle the structure of the life insurance strategy.

Hodari estimates investors have put upwards of $18 billion into similar funds along with other insurance products for the wealthy like Private Placement annuity contracts.

What Specific Benefits does Private Placement Life Insurance Offer?

So, what specifically is drawing people to Private Placement Life Insurance & Annuity programs? They offer an array of benefits to investors, including:

1. Own tax-inefficient assets in a tax-efficient structure

Private Placement Life Insurance & Annuity programs provide ownership of tax-inefficient hedge funds and other alternative investments in a tax-efficient structure. The owner trades incurring short and long-term capital gain taxation for annual insurance and annuity charges – amounting to significant tax savings.

2. Death benefit proceeds can pass to beneficiaries tax-free

Section 7702 of the United States Internal Revenue Code defines how life insurance contracts are taxed. Death benefit proceeds are received income tax-free to the policy beneficiaries. The cash value in life insurance contracts grows on a tax-deferred basis – and if structured properly, both the investment cost basis and gains can be accessed income tax-free.

3. No surrender charges

Unlike retail life insurance and annuity structures, there are no contractual surrender charges. The contract’s cash value can be accessed when needed, subject to the liquidity constraints of the underlying investments.

4. Exposure to a variety of alternative money managers, strategies, and asset classes

Private Placement Life Insurance & Annuity contracts have emerged as an attractive medium for exposure to traditionally high-tax, income-producing alternative asset classes. Both life insurance and annuity structures offer tax advantages – accomplishing temporary or permanent tax-deferral.

5. Transparent pricing structure

The transparent pricing structure is the concept of telling the client the total fee including the manager and due diligence fee, trading fee, and the custodian fee added to Schechter’s fee, compared to other firms that only tell the client their fee and nothing else.

Who is an Ideal Candidate for Private Placement Life Insurance? 

There’s no way to sugarcoat it, you have to be exceptionally wealthy to play in the Private Placement world. Accredited investors or qualified purchasers are required to contribute a minimum of $2 million into a Private Placement Life Insurance policy to set it up.

However, you get what you pay for.

With a properly structured private placement policy, clients are able to capture returns without the high tax implications typically associated with hedge fund investments. This equals healthy wealth accumulation for a client’s lifetime, to preserve for their heirs, and for charitable contributions if they so choose.

These returns can be accessed tax-free in two ways:

1. Withdrawing up to the investment in the contract

2. Borrowing funds from the policy

Funds that are left within the policy for life will never be subject to income taxes and heirs will receive the funds as an income-tax-free death benefit.

About Schechter:

Schechter is a boutique, third-generation wealth advisory and financial services firm, and has worked in the Private Placement environment since 2003. For 79 years, Schechter has quietly advised wealthy families on financial matters including: institutional-quality investment advisory services, private capital and alternative investments, advanced life insurance planning, income and estate taxes, business succession and charitable planning.