The major across-the-board problems not only negate the benefits of PPVL insurance, but also can cause considerable difficulties for all parties involved. A few such problems include:

Disqualification of the product as life insurance. When this happens, all the income is taxable as it occurs. Thus, the benefits associated with the life insurance wrapper are eliminated.

Money must be taken out of the policy, and the result is a taxable event. This can happen, for example, when the investment performance creates a Section 7702 corridor problem and there is not enough life insurance available in reserve.

The policy runs afoul of the modified endowment contract rules. This can occur because of poor construction initially, or it can occur because the product changes over time.

The policy matures as an endowment or worse, lapses. In the case of maturity as an endowment, the gains are taxed as ordinary income. When the policy lapses, there is phantom income.

Improper structuring of the policy also may lead to problems. This doesn't mean that such a policy cannot be underwritten. All it means is that it will not work properly. Examples of initial structuring problems include:

The client's goals and qualifications are not accurately assessed. This is becoming more common in those cases in which PPVL insurance is a souped-up variable product. It can also occur when PPVL insurance is presented as a panacea - a tax-management strategy capable of mitigating most, if not all, tax consequences. PPVL insurance is a very powerful tool when used the way it was intended. Trying to make it something it is not is a sure-fire way to court disaster.

An inappropriate insurance company is selected to provide the wrapper. With the seeming attractiveness of the market, many insurance companies are creating private placement variable life products. However, that does not mean they will be able to develop the product and support system that works well.

Related to the above point, the situs for application and policy can make a very big difference to the affluent client, and few insurance companies are taking this into account. When considering such things as state premium taxes, as well as asset protection, the situs for application and policy can have a dramatic impact. It also is an issue when the decision is made to go offshore.

Post-sale problems arise because the policy is sold and then "forgotten." As with all financial products, there is a clear need to monitor carefully the performance of the product (and the situation of the client) and to be prepared to make adjustments as necessary. Unfortunately, a growing body of anecdotal evidence suggests that most agents today are marketing PPVL insurance as a one-time transaction. Post-sale problems can come from a number of sources: