In the last few weeks, I have been getting a lot of questions around Private Placement Life Insurance and Annuity (PPLI/PPVA) products. A lot of this is driven by a recent Bloomberg article (

https://news.bloomberglaw.com/mergers-and-acquisitions/rich-americans-already-have-a-plan-to-escape-bidens-tax-hikes ). Specifically, people are looking closer at these products in light of the proposed and expected changes in the tax code. While I am far from a tax expert, I think it is safe to say that we are expecting an increase, especially for wealthy and ultra-high net-worth individuals. How do these products potentially help, and what do they do? Here at The Leaders Group, we have in-depth knowledge of insurance products, and PPLI is no exception. Some of the top salespeople in the country for these products call The Leaders Group home. With this experience, I hope to help demystify these products a bit.

There are a lot of moving parts in a PPLI policy, and it is very easy to get into the weeds and get incredibly lost if you dive too deep too quickly. That said, on the surface, they work fundamentally similar to standard “shelf” life insurance and annuity contracts. Just like their standard issue cousins, PPLI and PPVA contracts are an efficient way to provide preferential tax treatment for a client. The insurance products still provide a tax-free death benefit, and the annuity products are still tax deferred, with funds taxed at the client’s rate at the time of distribution. So far, so good. What separates PPLI products from the pack are the type of clients that make sense and the flexible nature of the underlying investments.

PPLI products are not for everyone. If you don’t have a client that has at least $5 million in the bank that they don’t need access to, look elsewhere. For the life products (as opposed to annuities), there also needs to be a life insurance need, because even with the preferential tax treatment, there may be ways that are more cost effective for a client to invest their money. From a sales perspective, PPLI/PPVA products are traditionally utilized for high net-worth individuals that are looking for a tax efficient way to grow their investment portfolio. The discussion is normally lead from an investment standpoint, meaning it is much more crucial to know the specific manager/managers that the client uses or would like to use. Once you know this, you can work in conjunction with the client and product sponsors on what the best investment structure is to fit the client’s needs.

There are two standard ways to structure investments inside of a PPLI/PPVA product. The first is more akin to what you are used to and is a menu of investment options that a carrier has available for their product. In the PPLI/PPVA world, this setup is called an IDF, or insurance dedicated fund. If a client does not have a specific manager in mind, or if the manager they want to work with is already setup as an IDF, this is an easy option as most, if not all, of the due diligence at the carrier level has already been completed. The alternative setup is called an SMA or separately managed account (some carriers have different wording, as I know at least one uses the MSA acronym). In this instance, the client can work with a manager of their choosing, even if the manager is not currently working in the PPLI/PPVA space. This also gives the manager greater flexibility at the client level, allowing them to manage each client account a little differently and closer to the client’s specific needs. The caveat here with SMAs is that the due diligence process is typically a little longer as many times the manager does not already actively work in the space. With either an IDF or SMA, the manager will need to determine whether they want to be setup directly with a specific carrier, or if they would like to outsource the compliance and accounting to a third-party platform like SALI or Spearhead.

One of the greatest values of PPLI/PPVA products is the flexibility allowed for the customer, manager and advisor. The areas mentioned above are some of the many possible levers that can be pulled for customization, with client cost being another major consideration. The carrier, manager and financial professional all have flexibility on their compensation. Not to mention the location where the client assets are domiciled (usually in a trust) also has an impact on the total cost. All of these are things that should be taken into consideration, and luckily, the various carriers can help you navigate all of the potential pitfalls.

In a nutshell, PPLI/PPVA products are for high net-worth individuals with plenty of disposable cash that they want to see grow in a tax advantaged fashion. If you are familiar with standard insurance and annuity sales concepts, many of the implications of PPLI/PPVA are similar. The flexibility and customization that comes with these products are a big piece of what sets them apart and where it is easy to get overwhelmed if you don’t have the experience. Luckily our team here at The Leaders Group, including some gracious financial professionals in the space and our carrier partners, are all here to help if an opportunity comes up. The products are definitely not for everyone but can be a good tool to have in your arsenal if you are working in the ultra-high net-worth space.

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Sean Wickersham, President

The Leaders Group is a leader in the sales and distribution of variable life insurance, so it only makes sense for us to talk about some of the compliance issues related to variable life.

First, to discuss variable life the agent must be securities registered with FINRA and the state in which the customer lives, and insurance licensed and appointed (with variable authority) in the state the paperwork will be signed. Should a representative need to add a state to their registrations, it can be requested through registrations@leadersgroup.net. Should an appointment be needed, it can be requested through contracting@leadersgroup.net.

Next, knowledge of the basic product is needed. The Leaders Weekly has numerous articles on variable life and carrier information. Past editions of Word on the Street are available here (password WOS-2021). Wholesalers are great sources as well, but several carriers should be contacted to get a balanced viewpoint. Product considerations include death benefit, premium options, strength of carrier (A- or above AM Best rating), cost of insurance, riders available, sub-accounts offered, fees, and guarantees.

Some of the pitfalls of variable life we have seen customers complain about include:

• Market losses during declines affect sub-accounts and customers complain they didn’t understand they could lose value
• Market increases and customers complain they didn’t make enough
• Customers take policy loans and then 1035 the policy without properly transferring the loan, causing tax consequences
• Customers don’t understand the holding period requirements of indexed and fixed sub-accounts and complain they can’t reallocate the money when they want to
• Customers don’t understand that it is not just an investment vehicle, and not just an insurance vehicle, but a combination of both

The way to avoid these pitfalls is making sure the customer fully understands the product. This includes the prospectus, the illustration, and the rationale for the recommendation. The prospectus is required to be delivered either electronically or hard copy. These are seldom read by the customer but must be delivered. The illustrations have to meet NAIC requirements and should not exceed 8% on the high side. The recommendation must be suitable which considers the need for insurance, if the customer can afford it and their risk tolerance is moderate or above, but the recommendation also must be in the best interest of the client. 

Once a recommendation is made, the application, illustration, investment account profile and variable life disclosure should be submitted to The Leaders Group through LEADERSlink. The file should include these as well as the delivery receipt and be kept for at least six years after the account is closed.

This is just a brief overview of some of the compliance aspects of variable life. Much more about variable life and the individual products can be learned by reaching out to our marketing team or carrier wholesalers.

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Jane Riley, Chief Compliance Officer