PRIVATERISK POLICY™ DESIGN
It is only logical for U.S. Taxpayers to search for legal means to minimize their ever-increasing real income and transfer tax burdens. The addition of the tax on Net Investment Income (“NII”) and the elimination of the deduction for state and local income and property taxes (“SALT”) above $10,000.00 per year have created an atmosphere whereby creative techniques for the reduction of that tax burden have to be considered. It is a function of the progressive tax system (and perhaps a cultural anomaly) that the more financially successful one becomes, the more likely it is that the tax burden will increase. Recent years have seen fewer and fewer tools available for financially successful people to legally avoid taxes. One of the few remaining mechanisms available to accomplish this goal is the use of life insurance products such as PPLI or PPVA. The federal tax laws permit the payment of death proceeds from a life insurance policy free from federal income taxes. Most state income tax statutes follow the federal model. This tax-favored treatment of life insurance proceeds has remained a constant for most of the existence of the income tax in America since the enactment of the Internal Revenue Code of 1928.
BESPOKE PRIVATE PLACEMENT
Bespoke Private Placement Life Insurance (BPPLI, or “Private Risk policies™”) is an advanced form of life insurance that can provide substantial advantages to policy holders above and beyond the life insurance policies that are sold by agents to the general public. The insurance benefits, application of tax favored status, and governing rules that apply to retail life insurance is also afforded to traditional life Private Risk policies.
As background, “A Private Placement Life Insurance (PPLI) policy is a type of variable life insurance policy. One of the chief tax benefits of a cash value life insurance policy is that the policy’s cash value accumulates free of income taxes.1
The types of investments available in a retail or mass marketed variable life policy may include stocks, bonds, mutual funds, and alternative investments. However, the menu of available investments is nevertheless limited by the offerings of the issuing life insurance company. A Private Risk policy is a variable life insurance policy wherein the menu of investments is not limited by the issuing life insurance company’s portfolio, thereby broadening the choices of cash value investments to an almost unlimited scope.2
If the assets held in a PPLI policy’s separate account perform well, the policy’s cash value may substantially exceed the policy’s minimum death benefit. Upon the insured’s death, the beneficiary receives the greater of the minimum death benefit or the value of the assets held in the separate account. In either scenario, the death benefit will be free from all income taxes, regardless of the identity of the beneficiary.” 3
– Steven Horowitz, Esq, Co-Founder, Private Risk Capital Development Advisors, LLC
THE FOUNDATIONAL CHARACTERISTICS OF
BESPOKE PrivateRisk Policy™ DESIGN
As you begin to appreciate bespoke PPLI plan design, it may be helpful to understand the types of investments that are available in a retail or mass marketed variable life policy. Such holdings may include stocks, bonds, mutual funds, and alternative investments. However, the menu available investments is nevertheless limited by the offerings of the issuing life insurance company. A PrivateRisk Policy™ is a variable life insurance policy wherein the menu of investments is not limited by the issuing life insurance company’s portfolio, thereby broadening the choices of cash value investments significantly.4
- An Insurance Dedicated Fund (“IDF”) holds the majority of the policy investment assets. The IDF is a preferred vehicle to hold assets within a policy structure. Properly administered Separately Managed Accounts (“SMA”), are permissible.
- The creation of the IDF and the manager you choose is client need driven.
- Based upon performance and consultation with the insurance carrier.
- Flexibility is built into the policy and the investment strategy, allowing changes when desired.
- The IDF or SMA are designed to achieve a diversified portfolio.
- The portfolio will become more diversified over time as earned dividends are re-invested without deductions for taxes.
- In addition, the manager can sell appreciated assets without capital gains exposure. This would be done confidentially due to the policy asset protection.
- The policy structure is designed to both protect assets and maintain compliant anonymity.
INVESTING THROUGH A PRIVATE RISK POLICY
- Private Risk policies, and the contract structure and terms, are customized to suit the client, their needs, and their situation.
- Policy holders may select their own trusted investment advisors to oversee and manage the cash value, and the liquid investments may be held in custody at the selected investment manager’s firm.
- Private Risk policies can hold traditional bankable assets, as well as a variety of business interests, real estate, art, oil and gas holdings, and other holdings.
- Complete transparency of costs on a pre-arranged term sheet. There are generally no commissions, only fully disclosed management fees charged by the PPLI Insurer, and the referring advisor is paid from the fee collected by the insurer.
- The policies can be owned by trusts and other structures that are regulated by state law and provide valuable privacy and protection to policy owners and beneficiaries.
- The policy Death Benefit may be acquired at a much-lower net cost, versus mass-marketed and retail insurance policies.
- Private Risk policies may distribute life insurance proceeds “in-kind”. In-kind assets can include the actual stock or ownership interests in private equity and real estate.
THE LIFEBOAT PROVISION
PrivateRisk’s bespoke PPLI designs are specifically engineered to significantly reduce the exposure of unanticipated life insurance cost increases or a dramatic reduction in policy values. Our proprietary policy design includes highly efficient pathway to safety should there be an unexpected rise in expenses. This valuable provision is designed to work even if the insured experiences a loss of insurability. Such capability is unavailable with standard traditional life insurance and is generally not offered through the PPLI policies sold by brokers.
INSTILLING OUR CLIENTS’ VALUES IN THEIR WEALTH PLAN
Advanced wealth planning often begins with calculations. Some advisors examine the bottom line and make suggestions based on spreadsheets. We understand that a full life is represented by more than points on a scoreboard. Each of our hand-crafted PPLI policy designs is fashioned to comport with the individual characteristics, needs and ambitions of our clients. No two solutions are identical because each of our clients is unique.
In summary, it is possible to invest through one’s IDF Manager and have one’s PPLI policy own the same types of investments that one’s advisors would purchase outside of such a policy. The financial advantages of Private Risk policies may include:
- The flexibility to own nearly any type of investment inside a diversified IRS compliant life insurance policy;
- The opportunity for enhanced appreciation due to the avoidance of tax on all capital gains and investment income inside the policy;
- The ability to access gains inside the policy on a tax-free basis4;
- The ability to transfer assets “in-kind” to a successor generation;
- The ability to obtain tax-free life insurance at a notably lower net cost;
- Transfer insurance proceeds at death on a tax-advantaged basis to loved ones.
1 § 72(e). Note that the policyholder will be required to recognize the taxable income and/or losses deferred under § 72 upon the occurrence of any one of a number of events, including sale, surrender, or lapse of the policy. All statutory references made herein are to the Internal Revenue Code of 1986, as amended (the “Code”), unless specified otherwise.
2 Contrast this use of the policy’s cash value with non-variable universal life insurance policies or whole life insurance policies, wherein the policy’s cash value is invested with the general account of the issuing insurance company. The general account of most major life insurance companies, especially the mutual companies, has historically performed well relative to the fixed-income investment markets.
3 § 101(a)(1). Note that the death benefit may be rendered taxable in the event of a “transfer for value,” a prominent exception explained in § 101(a)(2) and the Treasury Regulations thereunder.
4 For non-Modified Endowment (non-MEC) Contracts only. Non-MEC withdraws to basis are tax free. Loans may be obtained from the insurance policy on a tax-free basis. Clients should consult insurance counsel for further details. Certain advanced planning benefits that may be derived through a Private Risk policy can only be obtained through planning with expert counsel.