[The growing financial industry shift from a sales and product oriented practice to a holistic financial and retirement planning profession has forced advisors to think about investment vehicles in new ways. They need to consider what an investment vehicle can uniquely do—what is its context and maximal contribution to a comprehensive financial plan? Insurance, for example, traditionally seen by many as only a risk product is also being rethought and strategically redeployed as a wealth management and investment-oriented tool, especially in areas like annuities and private placement life insurance (PPLI) for ultra-high-net-worth (UHNW) clients.

To gain a better understanding of the unique place PPLI can occupy in the wealth management process, we talked to Institute members Tommy Mayes, president, and Alan Jahde, founder and CEO, of Investors Preferred, a bespoke carrier of private placement solutions to support advisors who offer sophisticated financial planning and wealth preservation planning. Investors Preferred was named one of the fastest growing life insurers in 2020 by Life Annuity Specialist. This may be a particularly good time in the evolution of the financial services profession to re-examine specialized financial tools and approaches for UHNW family wealth, as a lack of awareness or understanding will place advisors in a seriously uncompetitive situation.]

How has using PPLI for wealth preservation planning changed over the years?
PPLI as an investment and death benefit product has been evolving since the early 1990s. In the early days, only a few hedge funds were available to choose from as an offered PPLI policy investment choice for policy owner allocations, and these hedge funds were in insurance dedicated funds (IDF) placed on insurance company platforms. A wider selection of IDFs since then have increased allocation choices.

The investment choices have developed dramatically because of the evolution of adding separately managed accounts (SMAs) to some insurance company platforms. In the last 5 years, Investors Preferred has pioneered the concept of a non-comingled SMA that utilize professional RIA investment advisors with named custodians such as Fidelity or Schwab.

Can you more fully explain the level of investment control and flexibility available inside a PPLI wrapper?
Investment flexibility is available, yet the Investor Control Doctrine demands that separate accounts, which offer the most flexibility, be discretionarily managed by a sub-advisor retained by Investors Preferred on behalf of each policy. There also is a growing body of IDFs available for investment, as well as 1940 Act registered variable insurance trusts (VIT) or variable insurance products.

These options can be selected by the policy owner, but our advice is to utilize a professional investment advisor to develop a bespoke strategy best suited for the client and their specific situation. As a practical matter, for larger UHNW cases, open architecture is a reality today.

Outside of open architecture, what are the retirement planning benefits of PPLI?
A significant attribute of private placement is that one can obtain efficient tax-free asset accumulation over time, much like that available in defined contribution retirement plans and IRAs. Additionally, upon retirement or whenever the policy owner choses, he or she may withdraw funds on a tax-free basis for retirement. Alternatively, by leaving the funds inside the non-MEC (modified endowment contract) life policy, it would support a larger death benefit for the client's family.

What does the customizable combination of bespoke insurance and bespoke investment management uniquely provide as a financial engineering tool that benefits UHNW clients?
The combination of low- or no-load, fee-based PPLI solutions offering an open architecture of investment choices and strategies run by a client’s chosen investment advisor; resultant tax-free policy earnings; and tax-free withdrawals (non-MEC life policies) collectively combine to create a very efficient and bespoke after-tax investment tool. Plus there is a death benefit! Some compare it to “a Roth IRA on steroids,” with contributions limited only by life insurance capacity.

PPLI policies additionally have a huge advantage over traditional retail life insurance in that PPLI is also an excellent investment tool. It provides great flexibility of benefits as life events occur, such as divorce, business failure, or when a business is sold. The PPLI tax-free buildup accumulates resulting in a much larger account accessible without surrender charges. So, no money has been wasted on traditional life policies that even with many years have accumulated little to no net cash surrender values of premiums paid.

Can you share a few brief examples of case studies that show how some advisers are employing the unique benefits PPLI?
Business succession planning
—Mr. Adams owns a business 50/50 with an outside partner, Mr. Smith. Both partners are around age 60 and in good health. The total fair market value for the business is currently $50 million, but over the next 10 years, the value of the business is anticipated to appreciate to $100 million. The partners and the business entity have entered into Buy-Sell Agreements requiring $50 million of permanent life insurance death benefit on the life of each partner in order to fund a buyout of the business on the death of the first partner. Normally, the parties would have used a traditional retail life policy to fund the death benefit. But by using PPLI, the parties pay less for death benefit coverage, invest the proceeds of the cash value tax free, and grow the cash value for business related policy loans, to simply increase the death benefit, or as an investment tool. Being an excellent investment tool, PPLI has a huge advantage over traditional retail life insurance in the tax-free accelerated growth of the account value. Years later, if the Buy-Sell agreement is no longer relevant money may have been wasted on traditional life policies that, even after many years, have accumulated little or no net cash surrender values in excess of premiums paid. 

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