Recently, we were meeting with a new client who had sold his business and came in with a great deal of cash – multi seven-figures. He had an interest in buying real estate and other asset classes but wanted to be able to sell and not pay taxes on any gains . . . AND have liquidity for withdrawals and pay no tax on the gains. Whew! That’s a tall order!
In addition, he had a need – of lesser importance but a need none-the-less – for a life insurance death benefit to pay for death taxes on his estate.
Oh, and did I mention, in addition to non-taxable growth – liquidity – ability to diversify investment classes – a death benefit that would be outside Federal estate taxes – that he also wanted asset protection from potential creditors?
“OK, is that all?” I was almost afraid to ask. “I think so,” was his response . . . but I was half afraid he was going to give me five more criteria – so I did move on a little more quickly than I would otherwise!
“Well,” I responded . . . there are actually several ways we might do this, but likely the first strategy that comes to mind is called a . . . Private Placement Variable Insurance (PPVI) contract. Does that ring any bells?”
When he answered “No,” he was not familiar with the strategy, I began an explanation that we’ll continue in this month’s “Imagine That™”!
Who is Eligible for PPVI?
Interestingly, for many on the west coast of the U.S. it is an unfamiliar strategy. In the business hubs of the Midwest, however, and especially the Northeast, it is a very common planning tool for high-net-worth clients. This is especially true for those above $20,000,000 in net worth and investable assets of $3,000,000 or more.
To be eligible to purchase a PPVI, you must be an “Accredited Investor:”
- Those with earned income that exceeded $200,000 ($300,000 if married) in each of the prior two years and expects the same for the current year,
- Has a net worth over $1 million not including a primary residence,
- Is a financial advisor with either Series 7, 65 or 82 license, or
- Is a corporation, partnership, limited liability company, trust, or tax-exempt organization with assets exceeding $5 million, which was not formed for the purpose of investing in the insurance product
However, the above requirements are there for Securities and Exchange Commission registration exemptions. In reality, PPVI is generally an investment option for those with much higher income and net worth levels. Why? Funding a PPVI requires a minimum of $1,000,000 (although that can be contributed over time) and is often advised to be several million dollars or more.
What’s “Wrong” with “Retail” Variable Life Insurance?
For starters, the acquisition costs of retail insurance are greater because of the commissions built into the product. PPVI also has commission loads, but they are significantly lower – much like recurring commissions in a property and casualty insurance contract.
Also, with retail coverage the only acceptable form of premium payment is cash or check. PPVI, however, can accept premiums of stocks, bonds, mutual funds and even real estate! If the asset class has appreciated in value, those gains must be reported as if you had sold the asset, but it does make things more flexible when it comes to ways to pay premiums.
Further, in traditional insurance products, the insurance company decides how the premium will be invested. In PPVI, however, we can purchase various investments by using a Registered Investment Advisor, much like a self-directed IRA. So, adding a PPVI allows us to include alternative investments like hedge funds and real estate. These investment classes provide a much greater diversification that is not as “correlated” with traditional investments. That is, whether stocks go up or down in value does not affect a similar outcome in the non-correlated asset class.
What are the Benefits of a PPVI?
In addition to the opportunity for individual specific investing, PPVI allows for customization of policy charges, structure, and premium contributions because the contract is specific to an individual, not a general offering. While both forms of life insurance share similar expense and structure characteristics, PPVI can allow for a range of policy elements that best fit the individual and, in some cases, offer more competitive fees than retail insurance. For example, high-net-worth individuals historically show a lower mortality risk than the general population, which may result in lower mortality charges.
One of the significant benefits of any permanent life insurance which is correctly designed is that loans against the assets in the contract are not taxable when withdrawn. Given that these contracts normally have asset values in the multi-millions, being able to tap into the accounts without incurring any tax is highly advantageous.
For those in the construction industry and building trades especially, using an international situs for the account also exempts the money from the 10-year bankruptcy lookback rule. In addition, while these contracts are written by major American companies, if the situs of the assets is in an IRS approved offshore jurisdiction, you can make the assets unassailable to creditors after two years and one day. In many states, there is no creditor exempt time period, so this is a huge benefit.
Frequently, acquisition costs are lower as well. This is because of the reduced commission load as stated above, but also federal and state premium taxes are not assessed since the contract is purchased internationally. To be fair, certain other tax costs ARE assessed but are less than the premium taxes that would have been charged, if purchased domestically.
Are There any Drawbacks to PPVI?
Sure! Nothing is ever perfect.
While not a disadvantage specific to the structure or mechanics of PPVI, being available only to relatively high-net-worth individuals is commonly the first hurdle to incorporating these products into portfolio planning. Naturally, with the individually tailored nature of PPVI, the acquisition process can be more intensive and time consuming than retail life insurance.
And, while PPVI allows for a broader range of investments and individual specific management, the policy owner cannot exercise direct investment control of policy assets – hence the requirement to have a Registered Investment Advisor on the account to direct the purchase of various assets.
How Do I Acquire a PPVI Contract?
There are numerous elements and specifics when acquiring and maintaining/administering a PPVI policy. Like any complex financial/investment product, it is advisable to seek the guidance of professionals with extensive knowledge and experience specific to the product. PPVI is no different. Fortunately, Wealth Legacy Group®, Inc. works with leading professionals like national expert R. Mark McCullough, JD, founder and managing principal of Boulevard Financial, to assist you every step of the way.
If you’d like to hear more about the broad range of life insurance options that may be available to you, let’s schedule a complimentary 20-minute conversation to discuss if an alternative product like PPVI is the right fit. A life insurance policy custom made to fit your complete portfolio needs . . . “Imagine That™”!
Imagine That™! is a complimentary monthly newsletter provided by Wealth Legacy Group®, Inc. that addresses various topics of interest for high-net-worth and high-income business owners, professionals, executives and their families. Sign up to receive our monthly newsletter here.
R. J. Kelly, Wealth Legacy Group®, Inc. – July 2022
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