The growing appeal among the wealthy throughout the world for private placement life insurance and private placement variable annuities is resulting in new platforms such as CGS Financial Solutions LLC. Peter G. Sasaki, a managing member at the company, spoke with Private Wealth about the growing interest in this type of insurance.

Prince: Let’s begin by having you briefly explain what CGS Financial Solutions does and your role at the firm.

Sasaki: Basically, CGS Financial Solutions is an administrative platform for private placement life insurance—PPLI—and private placement variable annuities—PPVAs. Central to the way my partner and I set up the platform is to enable wealth managers, financial advisors and other investment professionals to manage the monies accumulating within these policies. We also provide a certain degree of business development support.

Historically, the investment vehicles in many PPLI policies were hedge funds and other private alternatives. Today, any capable and licensed investment professional, such as RIAs and independent money managers, can have their own customized PPLI and PPVA products.

When we decided to create CGS Financial Solutions, we wanted it to be an administrative platform that helps facilitate the process of providing these insurance solutions and addresses the compliance issues. We don’t manage the money, and anyone who is properly licensed can be the insurance broker.

We’re strictly the administrative platform. And while we can support many types of investment managers, including hedge funds, we designed CGS Financial Solutions for individual financial advisors and wealth managers and their affluent clients.

Prince: Can you give us a concise explanation of PPLI and PPVA?

Sasaki: PPLI is an insurance policy where the cost of the insurance is minimized. Meanwhile, financial advisors or other types of investment professionals manage the assets in the policy. While there is a slight additional cost to the affluent investor for PPLI, the growth of the assets is not taxed and, if the policy is properly structured, there are no taxes when money is taken out. It’s very possible to significantly increase the after-tax investment returns. PPVAs are just like traditional annuities, except the cost of the annuity wrapper is less, there are no commissions, and the investment professionals are managing the monies for their clients.

It’s important to recognize that these policies are insurance, which aside from the tax benefits can be very useful in various planning scenarios. But even though they’re insurance, there aren’t any traditional insurance commissions with either PPLI or PPVAs as there are with retail products. The fees paid to the insurance brokers are either basis points or consulting fees, and they’re regularly negotiable.

Prince: Who are appropriate candidates for PPLI or PPVAs?

Sasaki: PPLI and PPVAs are offered as private placement transactions. A person has to be either a qualified purchaser or an accredited investor. A qualified purchaser usually is defined as someone with a minimum of $5 million in investable assets. To be an accredited investor, it’s a lower threshold. You must have a net worth of $1 million or more, excluding the value of your home, or have an annual income of $200,000 for an individual $300,000 for a couple and expect to earn the same or more this year.

Now let’s say you are a qualified purchaser. PPLI or PPVAs have to make solid economic sense compared to other possible investment structures. For many affluent investors, PPLI and PPVAs have a very useful role in their portfolios and their planning. But these products are not for everyone. That’s why we find it’s important for the affluent investor’s financial advisors to be involved in the process to make sure PPLI is a good economic and personal choice.

For many appropriate investors, one of the biggest obstacles to using PPLI and PPVAs was the investment minimum. For example, say the investments in the PPLI policy [were] being managed by a hedge fund that required a minimum investment of $10 million. That number can put the product and its advantages out of reach for a lot of affluent investors. At CGS Financial Solutions, the minimum annual contribution to a PPLI policy is $1 million and the minimum contribution to a PPVA policy is $500,000. This lets a lot more qualified purchasers and accredited investors take advantage of these products.

Prince: Research shows that the rich and especially the super-rich are becoming increasingly interested in PPLI. Also, PPLI and PPVAs are getting a lot of traction with successful business owners. What’s the reason for this?

Sasaki: Yes, among the very wealthy such as family offices, there is increasing interest in PPLI and PPVAs. The wealth enhancement benefits of the products are considerable. Even with lower tax rates, the power of tax-free compounding is sensational. So for wealthy investors who are able to invest longer-term, PPLI and PPVAs are great ways to generate tax alpha.

It’s not just the investment tax benefits that are attracting a lot of wealthy people to PPLI and PPVAs; it’s also the planning opportunities. These planning opportunities are very appealing to accomplished entrepreneurs. For example, PPLI can be used to fund deferred compensation plans. It can be used to pay for corporate liabilities.

It’s not just the very wealthy and business owners that are gravitating to PPLI and PPVAs: So are celebrity entertainers, divorcees, star athletes and inheritors. For example, one of the problems in the world of big money sports is that many athletes fail to recognize their careers are pretty short and the big money they’re making might have to last a long time. That’s where these products come into play.

There are also a lot of ways that PPLI and PPVAs can be part of a wealthy person’s philanthropic agenda. For example, combining a charitable trust with PPVAs can result in what’s referred to as a charitable retirement plan. The individual can have monies growing tax-deferred within the charitable trust until they retire. At their death, the remaining funds in the trust can go to the charities they support.

When you consider all the possibilities, PPLI and PPVAs have incredible investment tax mitigation benefits. They can also be extremely useful as part of a person’s financial and estate plan. And with PPLI there’s also a death benefit.

Prince: Would you say that PPLI is superior to traditional life insurance?

Sasaki: PPLI and traditional life insurance have different uses. If a person wants guarantees, then traditional life insurance is the better choice. So to fund a buy/sell agreement, traditional life insurance is often superior to PPLI.

Where life insurance is being used as part of an investment strategy, PPLI and PPVAs can usually provide a more tailored solution. Along these lines, the ability for a high-caliber investment professional to manage the monies as opposed to the insurance company or the need to select a mutual fund is tremendously appealing.

Prince: What is the process for creating a customized private placement life insurance policy?

Sasaki: For investment professionals, the first step is getting on a platform like CGS Financial Solutions or one of the other platforms. This usually starts with a letter of intent and a non-disclosure agreement. Then we would conduct due diligence on the investment professional, including a background check.

If this goes well, we address a number of administrative matters, from fees to custodians. When it comes to the custodian, for example, it will almost always be the same one the financial advisor is currently using. At this point, we execute the investment advisory agreement and the custodian agreement. When necessary, we file with the appropriate regulators and everyone is ready to go.

After reviewing the steps with an advisor and providing him the paperwork, he said that it’s a big deal to get on the platform. I agreed with him. There are a lot of places where financial advisors and other investment professionals can run afoul of being compliant, thereby potentially hurting their clients and themselves. We’re very serious and highly motivated about making sure that doesn’t ever happen. A lot of time and effort goes into every aspect of on-boarding an investment professional and ensuring that advisors’ customized PPLI and PPVA solution is and remains compliant.

Prince: What difficulties do investment professionals tend to face in incorporating PPLI and PPVAs into their practices?

Sasaki: A lot of financial advisors seem to believe that creating their own customized PPLI and PPVA is the end point. Actually, it’s the starting point.

From a business development standpoint, there are some very effective ways to use your customized PPLI and PPVA product. On the one hand, there are systematic approaches financial advisors can use to leverage the products to get more assets under management from current clients. At the same time, PPLI and PPVA can be instrumental as a central component in a process-driven strategy to cultivate centers of influence, especially attorneys and accountants.

Another potential complication deals with framing. That is, how do you most effectively position PPLI or a PPVA to a wealthy prospect or client? Again, there are proven methodologies that financial advisors can use, thereby significantly increasing the probability of success.

Putting this together, if the objective is to do a sensational job for affluent clients and raise considerable assets to manage, it’s not enough for financial advisors to just create customized PPLI and PPVA products. They have to constructively integrate these products into their business development plans and activities. That’s why we’ve built a business development support structure at CGS Financial Solutions.

Prince: Peter, thank you for your time.

Sasaki: Thank you.