We’re hearing a lot about private placement life insurance (PPLI) these days. Actually, what we’re hearing about is private placement variable universal life (PPVUL). PPVUL sounds kind of esoteric, but it’s just like traditional variable universal life (VUL) except that it’s unregistered and only available to investors who meet certain income and/or net worth qualifications. The key to PPVUL is its investment flexibility for those interested in using PPVUL as a “wrapper” for otherwise tax-inefficient hedge funds or similar vehicles.
So, let’s assume that a client and their tax and investment advisors are about to meet with an agent for an introduction to PPVUL. This isn’t the first such presentation these advisors have heard, but because this will be more of a conversation than a presentation, they’ll finally have direct input on what’s covered. That’s 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-ended discussion.
Also, most PPVUL presentations the advisors have heard focused quite a bit on taxes. But as far as they know, PPVUL brings nothing more to the table than VUL does from a tax standpoint. Yes, some rules and constraints apply to PPVUL in the areas of investor control and diversification, but the basics are the same, that is, tax-deferred buildup of the cash value, tax-free access to the cash value and tax-free death benefit. So, this time, the advisors will ask the agent to leave taxes aside and focus on what matters to a policyholder over time, namely the product’s structure, pricing and performance and the service from the carrier and agent, respectively. I’ll note for the record that agents’ inability to address the hard questions about structure, pricing and so forth without constantly going back to the carrier is a major contributor to the seemingly extended PPVUL sales cycle, let alone the difficulty in weeding out prospect who are just kicking the tires.
The Wyden Proposal
Despite their intention to get right into the policyholder experience, the advisors recognize that they can’t ignore the tax elephant in the room, namely Senator Ron Wyden’s (D. Ore.) proposed Protecting Proper Life Insurance from Abuse Act. Given its potential significance, the advisors will ask the agent to address the technical and practical implications of Sen. Wyden’s proposal for a prospective purchaser of PPVUL. And, of course, they’ll ask whether the client should postpone consideration of the product until they have a clearer picture of what the bill will provide, its effective date and, of course, its chances for enactment. We’ll assume that the advisors will hear the agent out, leave the topic as “duly noted,” and move on.
A Wide-Ranging Conversation
It’s important to note that, also unlike prior presentations, this one won’t be built around a particular product. However, the agent will have a few illustrations handy because certain points are better explained with numbers and columns than words.
Here’s what the advisors will ask the agent:
Setting the PPVUL Table
- From the policyholder’s standpoint, what are the structural advantages of PPVUL over VUL, for example, breadth of investment options, negotiability of costs and agent compensation and lack of surrender charges?
- Aside from the risks associated with investor control, what are the potential disadvantages and risks facing the PPVUL policyholder that they likely wouldn’t face with VUL?
- Based on your experience, under what circumstances would even a qualified investor do just as well (if not be better off) buying VUL over PPVUL? When and why is PPVUL contra-indicated?
- What do you consider to be the hallmarks of a well-structured PPVUL product? Talk about functional features, investment options, charges and expenses and anything else you believe is important to the policyholder.
The Carrier
- Aside from its ratings, what specific criteria do you look for (and look out for) in a PPVUL carrier? Which PPVUL carriers make the cut in your view today, and why do they make it? Which ones don’t and why?
- Will carriers warrant that a policy qualifies as life insurance for tax purposes at issue and be kept in compliance thereafter as well? 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 inside the policy, and how does the due diligence process typically work?
- Generally, do carriers provide the policyholder with a set of operating rules for communicating with the carrier to assure compliance with investor control rules, etc.?
Agent Considerations
- Does the agent’s compensation structure for PPVUL differ from that of VUL? If so, how?
- Assume the policyholder becomes unhappy with the agent’s service. Can the policyholder simply replace the agent with an agent of their choice, or are there conditions imposed on that? Will the carrier direct all ongoing compensation to the new agent, or will the original agent have some claim on that compensation?
- Do policies allow the policyholder to pay the agent “outside” of the product so they can have lower charges inside the product and more flexibility to deal with the agent as a third-party service provider?
What Happens Next?
- Walk us through 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 policyholder service in these cases.
Steps in the Right Direction
This article should help tax and investment advisors facilitate a crisp, comprehensive and well-sequenced presentation by the agent. Agents who sell PPVUL can use the article in at least two ways. First, they can use it as an agenda for interviewing a PPVUL carrier seeking their business. Second, they can use it to fashion succinct, cogent, informative and advisor-centric presentations. Those could be good first steps towards identifying “real” buyers and shortening the PPVUL sales cycle. Last, agents who sell against PPVUL will find that the article can help them fashion equally succinct, cogent and advisor-centric arguments in rebuttal.
