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  • What is private placement life insurance?
  • August 9, 2013
  • Tony Steuer

    By Tony Steuer, CLU, LA

    Private Placement Life Insurance Products (PPIP) are non-registered Variable Universal Life (VUL) policies and Variable Annuity (VA) contracts that are offered exclusively to high net worth individuals.

    These products are filed with and approved by the state insurance department and are designed to comply with the current Internal Revenue Service (IRS) tax code. They have been referred to as a “hedge fund in a life insurance wrapper.”

    A Private Placement Variable Universal Life (PPVUL) policy is a non-registered-tax U.S.-tax-complaint (Internal Revenue Code (IRC) Section 7702), flexible premium life insurance policy that provides the same income-tax exempt death benefit as other variable life policies.

    Private Placement Life Insurance Products are offered exclusively to high net worth individuals.

    Premium less charges and fees are invested into the various investment options inside the insurer’s separate account.

    PPVUL provides flexible investment options (with some non-registered investments within asset classes that are not available in other life insurance policies), flexible premium payments, and flexible compensation to brokers.

    Also, PPVUL purportedly provides transparency to the buyer and the seller.

    What are the similarities between PPVUL and VUL?

    Under current U.S. Tax Law, the tax benefits include:

    -Tax deferral of any policy investment earnings and gains;

    -Tax-free exchanges between the underlying investment options;

    -Tax-free withdrawals (up to basis) and loans from the policy cash value free of income tax (provided the policy is a non-modified endowment contract) under IRC Section 7702A);

    -Income tax-free death benefit to the policy’s beneficiaries.

    How does a PPVUL differ from VUL?

    -Higher face amounts are required to maintain IRC Section 7702 compliance. Financial underwriting can be stringent and the reinsurance marketplace can be restrictive. Underwriting requirements are the same.

    -Investment flexibility:

    o Access to alternative investment styles and managers;

    o Ability to use hedge fund strategies aimed at reducing volatility;

    o Ability to add/customize options without a length filing and SEC regulation subject to minimum deposit requirements of $5 million within total life of the policy.

    -Load and charge structure

    o State regulations mostly allow charges to be negotiated, including insurance product charges, distribution expenses, and front-end loads, which are all generally more competitive than retail products.

    o No surrender charges – retail life insurance policies generally have significant back-end surrender charges (on a decreasing scale listing through 15 and up to 20 years).

    -The funds can have liquidity issues, for example, where the money is “locked up” for five years.

    -Can only be purchased be an “Accredited Investor” who is a “Qualified Purchaser” as defined by Regulation D of the Securities Act of 1933.

    Insurance companies require the investment management to comply with IRC Section 817 and related rules with respect to “diversification requirements and investor control”. A prospective policy owner must relinquish control and ownership with respect to the investment options available within a policy.

About Tony Steuer

Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.

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Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.

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