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INSURANCE
Suddenly it's not so attractive. Conventional insurance policies may be the way to go
Usually, clients buy private placement life insurance more as an investment vehicle than because they actually want life insurance. But unfavorable rulings and regulations have detracted from PPLI's allure as an investment. Moreover, because high-net-worth individuals often don't need to access the money in their policies for a long time, if ever, those policies become part of their estates.1
For wealthy clients, therefore, all insurance, including PPLI, should be evaluated from an estate-planning perspective. And from this vantage point, conventional life insurance products often are the better deal. Unlike PPLI, they can offer a guaranteed death benefit as well as riders that increase the face amount by the amount of premiums put in and an interest factor. Conventional policies also can be priced better.
PPLI is clearly for the wealthy. There's a bare minimum of $1 million in premiums and most require payments of at least $5 million. Membership has its privileges. The benefits PPLI enjoys that off-the-shelf life insurance does not:
* Its sub-accounts can be invested with money managers and/or strategies that are available only to very high-net-worth investors.
* The policy seller's commissions are negotiated and generally lower.
* Mortality costs are low compared to most commercially available life insurance policies; it's the difference between getting it wholesale versus retail.
PPLI also makes the most of the benefits that all insurance policies enjoy Investments in sub-accounts that would otherwise be tax-inefficient2 instead have no tax consequences.3 Holders can access their policy's funds without paying income tax (so long as the policy is not a modified endowment).
This is the sizzle that sells PPLI. But there's also some fizz about which clients should be made aware.
RAIN ON THE PARADE
The most dramatic drawback is that the Treasury Department and Internal Revenue Service have purposely made PPLI less appealing to potential investors. Beginning with a private letter ruling in 2002,4 followed by two revenue rulings5 and a proposed regulation6 in 2003, the feds have hampered the ability of PPLI policies to invest in hedge funds. Now, hedge funds might no longer satisfy the diversification required of insurance policies' investments. With Revenue Ruling 2003-91, the IRS...