We're hearing a lot about privately placed life insurance (PPLI) these days. In fact, what we're hearing is private placement variable universal lifetime (PPVUL). PPVUL sounds somewhat esoteric, but it's just like traditional variable universal life (VUL) except it's unregistered and only available to investors who meet certain income and/or net worth qualifications. The key to PPVUL is investment flexibility for those interested in using PPVUL as a “wrapper” for tax-inefficient hedge funds or similar vehicles.
So let's assume that a client and their tax and investment advisors are ready to meet with an agent about a PPVUL entry. This is not the first such presentation these advisors have heard, but because this will be more of a conversation than a presentation, they will finally have first-hand input on what is being covered. This is important to them because most presentations of PPVUL, let alone other life insurance concepts, are so prepackaged and tightly scripted that they leave little room for open discussion.
Also, most of the PPVUL presentations that advisors have heard have focused heavily on taxes. But as far as they know, PPVUL doesn't bring anything more to the table than VUL from a tax perspective. Yes, some rules and restrictions apply to PPVUL in the areas of investor control and diversification, but the basics are the same, namely, tax-deferred accumulation of cash value, tax-free access to cash value, and death without tax. they benefit. So this time, advisors will ask the agent to put taxes aside and focus on what matters to a policyholder over time, namely product structure, price and performance and service from the carrier and agent, respectively . I will note for the record that agents' inability to address difficult questions about structure, pricing, and so on without constantly going back to the operator is a major contributor to the seemingly extended PPVUL sales cycle, let alone difficulty in eliminating perspective. who just kick the tires.
Wyden's proposal
Despite their intent to dive right into the policyholder experience, advisers realize they can't ignore the tax elephant in the room, namely Sen. Ron Wyden's (D. Ore.) proposed Adequate Insurance Protection Act of life from abuse. Given its potential importance, advisers will ask the agent to address the technical and practical implications of Senator Wyden's proposal for a potential buyer of PPVUL. And, of course, they will ask whether the customer should postpone product review until they have a clearer picture of what the bill will provide, the effective date and, of course, its chances of approval. We will assume that the advisors will listen to the agent, leave the topic as “correctly marked” and move on.
A wide-ranging conversation
It is important to note that, also unlike previous presentations, this one will not be built around a specific product. However, the agent will have some useful illustrations, because some points are better explained with numbers and columns than with words.
Here's what advisors will ask the agent:
Setting up the PPVUL table
- From the policyholder's perspective, what are the structural advantages of PPVUL over VUL, for example, breadth of investment options, negotiability of costs and agent compensation, and absence of surrender charges?
- In addition to the risks associated with investor control, what are the potential disadvantages and risks facing the PPVUL policyholder that he is likely not facing with the VUL?
- Based on your experience, under what circumstances would even a qualified investor do just as well (if not better) buying VUL over PPVUL? When and why is PPVUL contraindicated?
- What do you consider to be the hallmarks of a well-structured PPVUL product? Talk about the functional features, investment options, fees and charges and anything else you believe is important to the policyholder.
The carrier
- Besides its ratings, what specific criteria do you look for (and look out for) in a PPVUL operator? Which PPVUL carriers make the cut in your opinion today and why do they? Which ones don't and why?
- Will carriers guarantee that a policy qualifies as life insurance for tax purposes and will be held in compliance thereafter? What other representations and warranties do you typically ask the carrier to make on behalf of a policyholder?
- Who does the initial and ongoing due diligence on the investment funds offered within the policy and how does the due diligence process typically work?
- In general, do carriers provide the policyholder with a set of operating rules for communicating with the carrier to ensure compliance with investor control rules, etc.?
Agent Considerations
- Does the agent compensation structure for PPVUL differ from that of VUL? If so, how?
- Suppose the policyholder becomes dissatisfied with the agent's service. Can the policyholder simply replace the agent with an agent of their choice, or are there conditions to this? Will the carrier direct all ongoing compensation to the new agent, or will the original agent have any claim to that compensation?
- Do the policies allow the policyholder to pay the agent “outside” of the product so that they have lower in-product charges and more flexibility to deal with the agent as a third party service provider?
What will happen next?
- Tell us about the questions you typically ask a client and the steps you take to determine how you would select and design a PPVUL policy that aligns with the client's objectives and best interest.
- Tell us about your platform and program for servicing policies in these cases.
Steps in the right direction
This article should help tax and investment advisors facilitate a clear, comprehensive and well-organized presentation by the agent. Agents selling PPVUL can use the item in at least two ways. First, they can use it as an agenda for interviewing a PPVUL operator seeking their business. Second, they can use it to create concise, compelling, informative and advisor-focused presentations. These can be good first steps towards identifying the “real” buyers and shortening the PPVUL sales cycle. Finally, agents selling against PPVUL will find that the article can help them craft arguments that are just as concise, persuasive, and focused to opposing counsel.