Gideon Strategic Partners Sees Significant UHNW Opportunities In Private Placement Life Insurance, With Caveats on Tax Structuring
There are no shortages of investment vehicles for high net worth (HNW, frequently defined as individuals or households with $5 million to under $25 million in net worth) and ultra-high net worth (UHNW, frequently defined as $25 million or more in net worth) clients.
But with economic, market, estate planning and taxation complexities all on the rise, financial advisors serving these client segments are seeking new solutions that can tackle multiple challenges in one sitting.
And as the search for multi-purpose investment solutions continues, the convergence of insurance and wealth management is intensifying.
Private Placement Life Insurance – On the Rise
The latest vehicle that blends insurance and wealth for HNW and UHNW clients is Private Placement Life Insurance (PPLI). While not necessarily a new product, it has enjoyed increased popularity recently because, if used correctly, the solution delivers significant value beyond traditional death payments for beneficiaries.
PPLI solutions were designed for individuals interested in hedge funds-like opportunities without exposure to similar capital gains taxes. Holding the assets in a properly structured life insurance policy provides investors with secure returns without tax implications.
But caveat emptor! As with any specialized investment vehicle, there are risks as well as rewards involved in moving in aligning clients with PPLI vehicles.
How to Navigate the PPLI Landscape
Robert Amoruso, CEO and Founder of Gideon Strategic Partners, a California-based wealth management firm with over $600 million in assets under administration, is a big believer in the value of PPLI for his HNW and UHNW clients.
Amoruso and his team have strong roots in both wealth management as well as insurance for the well-moneyed, regularly supporting clients in setting up PPLI plans for their families and trusts.
WSR caught up with Amoruso this week to explore PPLI opportunities and risks for wealth managers focused on the HNW and UHNW client segments.
WSR: What are the advantages of Private Placement Life Insurance for UHNW clients, and how does it work?
Amoruso: Private Placement Life Insurance (PPLI) investment accounts combine insurance protection with access to a selection of professionally managed investment accounts. It can be an effective vehicle for long-term accumulation and potential future income.
There are numerous advantages, including premium contributions made with after-tax funds, money accumulated on a tax-deferred basis and investment reallocation within the plan without realizing capital gains.
In addition, income taxes are eliminated on properly structured distributions, there’s a tax-free life insurance benefit for heirs, annual contributions are not subject to income caps, and distributions before age 59 ½ are not penalized.
WSR: Are there disadvantages or pitfalls with PPLI solutions?
Amoruso: The disadvantages that are mainly related to portfolio structure. For instance, an improperly structured policy may trigger a future taxable event, and too much insurance relative to contributions can impair investment performance.
There are also investment guidelines that PPLI Investment Accounts must abide by regarding securities allocations.
And it’s also worth noting that lump-sum distributions are limited to 80 to 85% of the account value before triggering a taxable event.
WSR: What is the typical client profile for whom PPLI solutions would be a strong fit?
Amoruso: Anyone considering a PPLI Investment Account must first be an accredited investor and qualified purchaser.
Moreover, because of the upfront structuring and administration costs, these accounts work best for those with a long-term time horizon and investors allocating to tax-inefficient asset classes (credit funds, high yield securities, high turnover strategies, etc.).
PPLI is best suited for those with at least a net worth of $20 million, since the upfront premium is typically $5 million.
WSR: Why is interest in the UHNW wealth management space for PPLI solutions rising – And why now?
Amoruso: Most UHNW investors are focused on what they can retain, not how much they earn. A seemingly well-performing asset can lose its luster after factoring in taxes.
These investors place a higher value on reducing income taxes and capital gains taxes over investment management fees.
WSR: For independent financial advisors with HNW / UHNW clients who want to align with a team that can support PPLI solutions, what are the capabilities and expertise that are “must have” considerations?
Amoruso: These investment accounts require deep technical expertise to structure the acquisition and long-term administration the right way.
Additionally, PPLI is a solution that requires vigilant analysis of expected returns compared to cost savings in taxes at varying rates within a specified period.
That’s why financial advisors who serve HNW and UHNW clients considering PPLI solutions should partner with a firm that has the PPLI expertise as well as the technology, infrastructure and personnel to manage these strategies over an extended period.
Independent financial advisors should also look to team up with a firm that has financial planning and modeling capabilities to help professionals clearly understand how PPLI programs fit with their clients’ financial situations and goals.
Another important consideration: It’s good to work with a carrier agnostic insurance partner to have access to favorable pricing and the flexibility of managing separate accounts.
Michael Madden, Contributing Editor at Wealth Solutions Report, can be reached at ContributingEd@wealthsolutionsreport.com