introduction to private placement.ppt · an introduction to private placement insurance and annuity...

Content intended for Agent and Broker Information Only. Not for Use with Clients or the Public.

An Introduction to Private Placement Insurance and Annuity Products

PRIVATE BANKING SOLUTIONS


Discussion Points• What is private placement life insurance?

• Why should your clients care about private placement life insurance?

• How does private placement life insurance work?

• What makes private placement life insurance different?

• What rules govern private placement life insurance?

• How is private placement life insurance distributed?

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PRIVATE PLACEMENT LIFE INSURANCE



Private Placement Life Insurance

Private placement life insurance (PPVUL) and

annuities (PPVA) utilize existing tax code

available to insurance products which, when

structured properly, allows for the tax free

growth of your client’s investment.


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Effects of current tax rates− High net worth investors are seeing

increasing federal and state tax burden

− The 2014 total effective tax rate on a high net worth individual could exceed 50% (depending on state of residency)

− Ordinary federal income tax rate increased to 39.6%, up from 35%1

− Increases in state income tax (depending on state of residency)

Erosion of Wealth


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1 http://www.irs.gov/pub/irs-drop/rp-13-15.pdf



Comparison of Income Tax Rates (Top Bracket)1

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1 http://www.irs.gov/pub/irs-pdf/f1041es.pdf, http://www.irs.gov/publications/p17/ch16.html, http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions, https://www.ftb.ca.gov/forms/2013_california_tax_rates_and_exemptions.shtml, http://finance.yahoo.com/news/10-worst-states-taxes-2014-110000784.html, and http://www.bankrate.com/finance/taxes/state-taxes-california.aspx



• Features of PPVA and PPVUL

• What makes PPVUL different

• Potential risk factors

• Client Profile

• Case Study

PPVUL and PPVA Overview

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Traditional Retail Life Insurance Private Placement Life Insurance

Death benefit purchase Investment purchase

Maximum death benefit Minimum death benefit

Small premium deposits over multiple years Large premium deposits generally from 1 to 7 years

Minimum guarantees No investment performance guarantees

Back end fees No surrender charges

Registered investment options Non-registered, alternative investment options

Retail pricing Institutional pricing

No flexibility Flexibility

Limited transparency in pricing Full transparency in pricing

What makes PPVUL different?

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Features of PPVA & PPVUL

PPVA PPVUL

Health Underwriting No Yes

Tax deferred growth Yes Yes

Income tax free death benefit No Yes

Opportunity for favorable tax treatment on loans & withdrawals

NoYes

(if structured properly)

Segregated assets/bankruptcy remote Yes Yes

Capacity constraints No Yes

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Potential Risk Factors

• Investment Risk

• Regulatory / Audit Risk

• Carrier Risk

• Liquidity Risk

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Client Profile

• Ultra high-net-worth individuals, sophisticated investors, family offices, etc.

• Owner must qualify as an Accredited Investor (AI) and Qualified Purchaser (QP)

• Typically invested in tax inefficient investments that generate substantial ordinary income

• Looking for cash accumulation, wealth transfer, and/or charitable giving

• Typical Net Worth: $20M plus

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• Male Age 50 Preferred Non-Tobacco• 50% Income Tax Rate (Federal + State)• Earning 7% net of investment fees• Comparison:− Taxable Investment: Single deposit of $5,000,000− PPVUL:

– $1,000,000 per year for 5 years– minimum non-MEC face amount of $18,095,720– 0% Compensation– Account Maintenance Charge: Yrs 1-10: 0.25%; 11-20: 0.20%; 21+: 0.15%

Case Study: Taxable Investment versus PPVUL

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Male, Age 50 Preferred Non-Tobacco Taxable Investment: $5,000,000 single deposit; PPVUL: $1,000,000 per year for 5 years

50% Income Tax Rate • 7% Gross Rate of Return

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Case Study: Taxable Investment versus PPVUL

$11.9MIRR: 6.4%

$8.7MIRR: 3.5%

$55.6MIRR: 6.5%

$19.8MIRR: 3.5%




• Targeted towards investors who are interested in deferring income tax and

potentially reducing or eliminating income tax

• Can be further enhanced for investors who:

− Want to transfer wealth to future generations in a tax-efficient manner

− Have assets in trusts or family partnerships seeking long term tax-free asset

growth

− Wish to increase their life insurance coverage in a cost-efficient structure

PPVUL: Client Appeal

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Case Study: Taxable Investment versus PPVA

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• 50% Income Tax Rate (Federal + State)• Earning 7% net of investment fees• Comparison:− Taxable Investment: Single deposit of $5,000,000− PPVA:

– Single deposit of $5,000,000– 0% Compensation– Account Maintenance Charge: 0.35%




-

10

20

30

40

50

60

70

1 6 11 16 21 26 31 36

$ M

illio

ns

Policy Cash Value Taxable Investment Value

Taxable Investment: $5,000,000 single deposit; PPVA: $5,000,000 single deposit50% Income Tax Rate • 7% Rate of Return

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Case Study: Taxable Investment versus PPVA

$13.9MIRR: 6.6%

$8.7MIRR: 3.5%

$65.1MIRR: 6.6%

$19.8MIRR: 3.5%




• Investors interested in deferring income taxes

• Can be further enhanced for investors who wish to make a meaningful

charitable bequest with assets they prefer to control during their lifetime

PPVA: Client Appeal

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• Section 7702 (life insurance)

• IRC Section 72 (annuities)

• IRC 817(h)

• Investor Control Doctrine

Applicable Federal Tax Laws

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1980’s

• For over 30 years, corporate 500 companies, banks, and institutional investors have been utilizing insurance vehicles as a way to make the most of the tax advantages provided by the tax code through corporate owned life insurance (COLI) and bank owned life insurance (BOLI)

1990’s

• For years, high net worth clients have invested in alternative asset classes such as hedge funds and hedge fund of funds. However, investors quickly realized that strong investment performance could be offset by tax inefficiencies created by frequent trading by hedge fund managers.

2005• Changes to the regulations under Internal Revenue Code Section 817 removed the distinction

between registered and non-registered partnership interests.

Tax Code Allowing Tax-Free Growth to Investments

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Client/Purchaser

InvestmentManager

Carrier

Insurance Professional

Distribution

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ProfileInvestment Manager & Insurance Professional

Investment Manager• Registered and non-registered funds• Tax inefficient strategy

Insurance Professional • Insurance licensed• Securities licensed

Insurance Carrier• Product provider (PPVUL and PPVA)• Onshore vs. Offshore

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Appeal of Private Placement Business

Investment Manager

• Opportunity to grow AUM• Ability to offer tax preferred investment option

Insurance Professional

• Create & generate revenue on an asset based business model• Extension of estate planning (income tax mitigation planning)

Insurance Carrier

• Strategic fit with target market (affluent and ultra affluent consumers)• Balance between traditional products and private placement products

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Conclusion• Clients are seeing an increase in federal and state income taxation

• PPVUL & PPVA can provide deferral, reduction and/or elimination of income taxation

• Only available to sophisticated investors who qualify (AI & QP)

• PPVUL & PPVA are customizable and transparent products

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Content intended for Agent and Broker Information Only. Not for Use with Clients or the Public. 23

Questions?




Important DisclosuresZurich American Life Insurance CompanyAdministrative Office: 7045 College Boulevard, Overland Park, KS 66211-1523877-678-7534

Securities are distributed by one or more registered broker-dealers.

This presentation, and the information and materials included herein, have been prepared solely for informational purposes, and are neither an offer to sell, nor a solicitation of an offer to purchase.

Nothing herein shall constitute tax, legal, or investment advice.For agent and broker information only. Not for use with clients or the public.

Chad Nulty is a Registered Representative of BFP Securities, LLC (Member FINRA) Six CityPlace Drive, Suite 400 St. Louis, MO. 63141314-729-2210

©2014 Zurich American Life Insurance Company. A1-91968-A (06/14) 14-0099


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introduction to private placement.ppt · an introduction to private placement insurance and annuity...

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