The stock markets may be slumping, but the affluent market remains hot. What do we mean? Even though there is currently a great deal of volatility permeating the financial markets, private-wealth creation throughout the world is historically unprecedented. Simply put, the affluent market is booming. There are more wealthy people now than ever before, and they have more wealth.

Because the affluent market is hot, the competition for high-net-worth individuals has never been keener. And because managing the financial affairs of the affluent is a great business to be involved with on a risk-adjusted basis, it is increasingly competitive. To be successful in these times requires a sharply focused approach, a strategy that usually involves being able to provide high-net-worth individuals state-of-the-art solutions.

Right now, one of the most intriguing products to provide to an affluent client is private-placement variable life (PPVL) insurance. For a meaningful segment of the high-net-worth market, PPVL insurance is the answer to many of its needs and wants. Our research among affluent individuals who already have obtained the product shows that their evaluations are extremely positive. When we survey the affluent and ask about PPVL insurance, we inevitably find a high degree of interest. PPVL insurance is a technical product that must be sold by an expert advisor (it is not the sort of product that will drive buyers to advisors' doors). We find that there is increased interest among the affluent in alternative investments, as well as investment-oriented tax management, and it therefore follows that there will be increased interest in PPVL insurance. However, PPVL is not for all clients; advisors need to know that unless it is structured, executed and monitored properly, it can prove to be disastrous.

Life insurance has certain tax benefits that make PPVL insurance an excellent choice in the right situations. In general, life insurance possesses benefits such as a tax-free buildup of cash values and first-in, first-out accounting treatment of premium contributions and withdrawals. Also, there is the ability to mitigate estate taxes by incorporating an irrevocable life insurance trust and/or by setting up a private split-dollar plan.

These generic life insurance benefits are leveraged in the context of PPVL insurance. The key here is the private placement aspect of the policy. Because we are dealing with high-net-worth individuals, there is the opportunity to move beyond the types of investments found in traditional variable life insurance policies. The preferred option turns out to be alternative investments (particularly hedge funds) as the investment vehicle. PPVL insurance enables high-net-worth individuals to trade off paying income taxes on portfolio income and transactions for the much smaller costs inherent in PPVL. Thus, the taxes generated by high-turnover hedge funds, for instance, can be rendered moot.

Aside from the tax advantages of PPVL insurance, additional benefits also are available. For example, the assets placed in the policy can be made secure from creditors and litigants. Further benefits can be achieved, depending on the way the product is structured.

The financial services industry is taking a range of approaches to providing this product. At one end of the spectrum is a souped-up version of conventional variable life insurance. At the other end of the spectrum is a totally customized approach adapted to individual high-net-worth clients. In the middle is a panoply of variations.

Which is the best product for a wealthy client? Well, it is a function of the individual and the situation. According to the research, the most satisfactory approach is to create customized policies for high-net-worth individuals so that the affluent person has the opportunity to designate the money managers in the product. This customized approach may not always prove viable depending on the client and his/her situation.

The Potential For Disaster

While there are significant benefits for affluent clients by employing PPVL insurance, there is also the potential for significant complications and even the potential for unmitigated disaster. Within the process of providing PPVL, there are a number of possible land mines that can blow up the product, the client and, consequently, the advisor. Some of these land mines are major across-the-board problems; some are product-structuring problems; and some occur post-sale. To get a better feel for what can go wrong, let's briefly consider each category of problems.

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