Recent events within the private placement life insurance industry have created renewed interest within this specialized segment in the life insurance industry. The industry has seen some consolidation over the last several years and recent events including the entrance of large investment management firms has made the product relevant once again. I would argue that the product never stopped being relevant for institutional and high net worth buyers. The purpose of this article is to offer a few personal thoughts regarding recent trends in the private placement life insurance industry.
Life insurance and annuities uniquely enjoy very strong tax-advantaged status around the world. In fact, no other financial product globally enjoys the tax treatment of life insurance and annuities. When you have the ability to customize the investment options and offer the policy on an institutionally priced basis, the financial advantages grow exponentially. The topic is relevant and deserves coverage. If private placement life insurance (PPLI) is to have its “moment in the Sun”, that moment is now!
In the Beginning of Private Placement Life Insurance
The private placement life insurance industry has had several iterations of “stop and starts” since the mid 1990’s. The niche product has never reached its full potential for a number of reasons. In my view, the primary reason is lack of distribution, i.e. people selling the product. Life insurance salesman like to sell fully commissionable products rather than low load or no load products. Non-life insurance salesman have difficulty selling a complex product like private placement life insurance (PPLI). In some cases, they feel that selling life insurance is professionally beneath them.
As a result, this market segment has never enjoyed having more than twenty five capable salesman selling PPLI at any given time. It’s obvious that you can’t build an industry on the backs of twenty five people. At the same time, investment professionals and RIAS have not previously embraced PPLI because they culturally believe that anything has the word “insurance” in it is instinctively bad.
[box]The PPLI industry probably has approximately $15 billion of assets under management collectively in the onshore and offshore marketplace. During this timeframe hundreds of billions of dollars flooded in and out of tax inefficient hedge funds at the same time that a perfect tax solution for these tax inefficient investments laid by the wayside.[/box]
Any number of private banks and wirehouses also looked at PPLI in the past. Typically the due diligence process within the bank would take so long that the executives heading the project would leave somewhere in the middle of the project for a new job. The end result was nothing ever got started. At the same time, the “churn and burn” mentality of investment brokers was not well suited for a long-term product like PPLI. Tax and estate planning attorneys never pushed the product because they get too much business from retail life insurance agents. Once CPAs got a dose of retail commission selling life insurance, they turned their backs on PPLI as well.
The life insurers in the PPLI marketplace are the anti-thesis of the large life insurers. Most buyers want the largest, oldest and most financially solvent life insurer. There is nothing wrong with that model except in the PPLI marketplace. Without exception, every large life insurer has existed the high net worth PPLI marketplace – New York Life, Sun Life, American General, MassMutual, and Nationwide. As a result, the industry is left with small closely held life insurers that are very sophisticated but without the cache of Northwestern Mutual.
In the PPLI market segment, every policy is a customized deal. Buyers purchase PPLI because the want the death protection and tax-advantages of life insurance within a low cost policy with customized investment options. Virtually all of the mortality or death benefit risk is reinsured with large investment grade reinsurers. Statutory exemptions in the jurisdiction where the policy is issued protect the policy assets from the claims of the insurer’s creditors.
What Happens Now?
In my view, every life insurer in the PPLI space – large or small – benefits from recent trends and acquisitions of carriers within this market segment. The global investment access of large investment management firms combined with the customized tax-advantages of PPLI, will allow carriers to access buyers and sellers it might never have met. Investment firms and traders including RIAs are likely to become more active participants in the PPLI marketplace. At the same time, the PPLI industry realizes that you need to have more than twenty people selling the product. The entrance of large global investment management firms will fundamentally change the way that large law firms look at insurance products in general and how these attorneys structure for foreign inbound investment planning.
Life insurance agents will recognize that the sale of PPLI products does not necessarily cannibalize the sale of retail products. Investment professionals will form joint venture arrangements with life insurance professionals to utilize private placement insurance products.
Summary
I have been active in the private placement life insurance industry on a fulltime basis since 1999. I have been an independent broker, home office employee, and attorney working on PPLI. I have seen the industry take several left-turns to the Road to Nowhere. I am very favourably encouraged for the private placement life insurance marketplace. Small PPLI carriers will benefit from the increased interest in the product. The Blackstone connection will also create a higher degree of respect and interest from professional advisors such as attorneys and accountants. This phenomena will be global in nature.
Investment professionals will suddenly wake up to the tax magic and planning benefits of life insurance and annuities. RIAs will suddenly realize that they can manage their client assets within life insurance on a low cost basis. With the investment management trend continuing to move towards assets under management, private banks and trust companies will move into the game. Retail life insurance agents will realize this a great way for them to be compensated for assets under management without interfering with their retail life insurance business.
Let it not be said like the lyrics of the song – And he never gives an answer but the Fool on the Hill. PPLI has been and remains an important financial product. Don’t be late to the dance.
[box]
Gerald Nowotny
Law Office of Gerald R. Nowotny
266 Lovely Street
Avon, CT 06001
United States
860-404-9401
TaxManDotCom.com
[/box]
Leave a Reply