Captiva: Life insurance for wealth management

Monique MacDonald and Harry Thompson of Captiva look at the strategic approaches to asset safeguarding and why private placement life insurance can form an essential part of wealth management.

 

Life insurance is an essential component of wealth management and provides a strategic approach to save, invest and protect funds for the next generation in terms of asset safeguarding and estate planning purposes.

Private placement life insurance (PPLI), and private placement annuity policies in particular, can form an essential part of wealth management.

PPLI consists of a variable universal life insurance policy which is a permanent life insurance policy with an investment component.

The policy generally comprises a segregated investment account and a fixed death benefit upon the death of the insured person.

US investors must meet the US Securities and Exchange Commission’s accredited investor and qualified purchaser standards, and the insured must medically qualify for the life insurance.

PPLI is a niche solution for ultra and high-net-worth investors (HNWIs) who have an interest in transparent yet sophisticated asset management options for long-term wealth planning.

How does it work?

A PPLI policy provides the beneficiaries of the policy with a fixed payment upon the death of the policyholder in addition to the value of an investment portfolio embedded in the policy.

Underwriting of the death benefit component is based on medical insurability of the policyholder.

Premium payments vary but may be paid upfront, which offer the benefits of compacting the payment period into the early years of the policy when the true cost of insurance is lower and allowing for a longer time frame for the proceeds to accumulate through investment earnings.

This accumulation is beneficial as investment income and capital gains earned by the policy assets are usually exempt from taxes in the same vein as traditional life insurance, providing the income and capital gains remain inside a properly structured life insurance policy.

Where traditional life insurance policies over a limited range of investment alternatives or participation in the general investment account of the issuing life insurer, PPLI allows a broad range of investment alternatives, including privately held securities to be held as policy assets.

However, a PPLI owner can’t take part in any conduct that could be deemed to be investor control, as doing so could negate any tax benefits.

Under the US investor control doctrine, the policyowner should not communicate directly with the investment manager or in any way direct the manner in which the investment advisor should invest the segregated investment account assets. HNWIs and family groups frequently choose PPLI because of such benefits as:

  • Flexibility: PPLI enables customisable investment strategies using external investment advisers, including separately managed accounts, hedge funds and other alternative investments.
  • Transparency: Costs of a PPLI policy are broken into individual components, including cost of insurance, policy administration and investment-related fees, and are based on a fixed fee level or a fixed percentage of policy assets.
  • Security: PPLI policy assets are typically held in custody by a highly rated financial institution and assets are legally segregated from those of the insurer and other policyholders.

Helping investment managers

A property-run life insurance company is an effective vehicle for issuance of PPLI and private placement annuity policies.

The use of segregated account structures is a key risk management strategy for PPLI and annuity business.

Forming the life insurance company as a segregated portfolio company accomplishes this objective as it allows for the segregation of policy assets from other policies as well as the life insurer itself.

Life insurers formed in well-regarded domiciles such as the Cayman Islands benefit from a wealth of industry knowledge and careful regulatory oversight.

The importance of life insurance as succession planning continues to rise, and PPLI provides tax-efficient benefits to families with sophisticated wealth management and asset planning needs.

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