What is Private Placement Life Insurance & Variable Annuities?

Private placement life insurance and variable annuities, also known as PPLI and PPVA, are variable insurance contracts that allow purchasers to direct the premiums they put in into a number of investment options. It includes things like alternative investments. Many investors that want to take on different types of risk or different investment options within an insurance contract will choose to use PPLI and PPVA. 

Annuity Policy vs. Traditional Insurance

The annuity policies are quicker to set up, easier to set up, have lower minimums, they have the same investment options you would have in a private placement life insurance policy, and the charges are often lower. 

However, in an annuity policy, someone will pay the tax. This means the life insurance policy is a more tax-efficient choice. It’s a more common and popular choice. That said, we still see a lot of investors and their advisors wanting to use the annuity policies because of the simplicity of use. 

Unlike traditional insurance, private placement life insurance and annuity policies are stripped-down insurance policies. You get a death benefit, but you’re not getting a guarantee that the cash value will grow by a certain amount. It’s very different than a whole life or an indexed universal life or universal life policy. 

Who is the Ideal Candidate?

The ideal candidate to purchase a private placement life insurance policy is either someone who already wants to own these types of asset classes in their portfolio–alternative investments, hedge funds, other tax-efficient investments. The other is those investors that, for one reason or another, have chosen not to participate in those asset classes because of the tax implications and if tax implications weren’t a factor in their decision, they would probably want to have exposure. 

Private placement life insurance creates that structure that eliminates the tax consideration for the most part and allows investors to choose what they want to invest in in a more robust fashion. 

In addition to wanting to have exposure to these types of asset classes is generally going to be someone with a very high net worth. Generally, that means a minimum $20 million net worth for someone to consider this. 

Key Benefits of PPLI and PPVA

One of the benefits of PPLI and PPVA is that you can purchase alternative investments. In a traditional variable life policy, you can purchase mutual funds and other traditional investments, however, you don’t have access to hedge funds, real estate, private credit, and other alternative strategies which are only available to qualified purchasers. 

The benefit to a client of purchasing a private placement life insurance policy, in addition to the death benefit, is the ability to have the cash value inside of the policy growing tax-free or tax-deferred depending on the structure that you choose. 

Setting Up PPLI or PPVA

When purchasing a private placement life or annuity policy, the investor has the choice to allocate premiums into something called an insurance-dedicated fund, otherwise known as an IDF, that has been pre-approved by the insurance company. The lists are vast. They include traditional mutual funds offered by some of the largest carriers in the world, as well as alternative funds offered by some of the largest alternative asset managers in the world. 

If an investor chooses to go outside of the scope of the IDF marketplace, they can have an investment advisor listed as the separate account manager on the policy. However, they can’t just choose any investment advisors. They have to work with someone who’s been pre-approved by an insurance company or they can have their investment advisor go to the insurance company and get approved to manage the investments inside of the policies. 

Once they do that, that investment advisor, while having to adhere to strict rules around diversification and investor control, that advisor can go outside of the scope of the insurance-dedicated fund landscape and have a broader opportunity set to choose investments. 

Considerations Before Setting Up a Policy

There are important considerations when purchasing a private placement life insurance policy, one of them being that there are charges every year on these contracts. They’re not very high, but they’re there. If the investments underperform, the policy could be at risk of lapsing, so it’s very important to have a diversified portfolio or a strategy or plan in place for what’s going to go inside these policies from an investment perspective. 

Another thing to be careful of is that there are strict rules and regulations around investor control, diversification, and a myriad of other factors that, when purchasing these policies, clients need to be careful not to violate. Working with an experienced professional will help make sure that all of the rules that need to be followed are followed. 

How to Think About PPLI and PPVA

A good way to think about private placement life insurance is as a planning tool that you can incorporate into your business to provide your clients with a more tax-efficient approach to accessing alternative investments. 

This can be as complicated as you’d like, but what it really boils down to is that it’s a policy–a life insurance policy–that you can purchase alternative investments in, and whatever the objective that you try to accomplish with that policy can follow. But it’s important for people to recognize that you can own the same types of assets that you already own and are looking at inside of these contracts.