This month, Jay chats with Alan Jahde, JD, LLM, Founder & CEO, Investors Preferred Life Insurance Company. The pair discuss Alan's unique path through the life insurance industry, the ins and outs of the PPLI market and Alan's new passion for sailing.
JAY: It isn’t every day that I get to sit down with someone who has started not one, but two, life insurance companies. Just this distinction alone is incredible, Alan, but what is even more notable is the growth trajectory of Investors Preferred, the South Dakota life insurance company you founded just eight years ago in 2013. I am enamored by this success, but also impressed because the life insurance industry wasn’t your first – or even second – career choice. We will get to your path to the industry in a second but, first, I would like to hear more about Investors Preferred.
ALAN: Jay, first, let me say how thrilled I was to be asked to do this interview. These conversations have become a staple of the industry. Our company, Investors Preferred, is a niche life insurance company catering to ultra-high net worth clients. It only issues private placement life insurance or annuity policies designed to accomplish efficient tax-free cash value build up inside the policies and eventually deliver income tax-free death benefit in the case of the life insurance policies.
Investment flexibility and a wide array of investment choices is also a key feature, resulting in life insurance or annuity policies being a very tax efficient investment tool to accumulate wealth and to efficiently pass wealth on to younger generations.
JAY: You and I both grew up in small towns in the Midwest – you in Nebraska and, me, in Iowa; though, I was not an actual farm boy like you. Take me through your upbringing and how your career eventually brought you to starting a life insurance company.
ALAN: Growing up on a dairy farm in Nebraska outside of a small town taught me the value of hard work and also the value of education. I was lucky enough to earn scholarships to help defray the costs of college, and a rare scholarship to help defray the cost of law school. Additionally, in order to have a deeper understanding of the complicated area of tax law, I then enrolled and earned an LLM in Taxation from the University of Denver, which really catapulted my career as a tax lawyer.
A lot of folks don’t know that I started my career after college as a licensed realtor and I wanted to be a real estate developer after law school. I even taught real estate law at the University of Nebraska. When I started practicing law, though, I moved in another direction.
I first came across private placement life insurance planning in the mid-90s, and just used it as another arrow in my quiver of tax planning tools for my law practice clients. After 5 or 6 years of introducing the concept of PPLI to clients, enough clients had purchased life policies and I saw an opportunity to start a life insurance company.
The first foray into creating an insurance company was in Bermuda, and we obtained an insurance license in 2001. While Bermuda is the third largest insurance center in the world and is a well-respected country and regulatory system, Bermuda still carries an offshore stigma in the minds of some U.S. clients or their advisors.
As a result, in partnership with a very successful colleague, client, and friend, it seemed prudent to create a U.S. life insurance company, initially in South Dakota, which was licensed in 2013. Many of my law firm clients in the Bermuda life company preferred a U.S. carrier, so many of them moved their policies to Investors Preferred via IRC Section 1035 tax-free exchanges from Bermuda to South Dakota.
JAY: If you had remained a realtor, I firmly believe the PPLI industry would have suffered and not be as relevant as it is! Investors Preferred is domiciled in South Dakota and there are some other PPLI carriers licensed there and in other states. For the most part, though, a lot of PPLI carriers are set-up offshore in places like Bermuda. You and I spoke about how there is a big difference from a consumer protection perspective when it comes to onshore regulated insurers and offshore one. In what respect and why is this important?
ALAN: Having run and managed both an insurance company in Bermuda and Investors Preferred domiciled in South Dakota with Investors Preferred being subject to the rules and regulations of both South Dakota and the National Association of Insurance Commissioners system, or the NAIC, the regulatory environment is dramatically different between the two jurisdictions.
The regulatory emphasis in Bermuda seems to be heavily geared to anti money laundering, which is necessary and important as no company wants to be involved with drug money, dirty money, or other types of illicit activities. However, far less emphasis exists in Bermuda regarding client or consumer protection.
If a policy holder has an issue with a Bermuda insurance carrier, there is far less support and assistance from the Bermuda insurance regulator in the offshore environment compared to the recourse available against a state domiciled insurance company and the consumer support from state regulators.
For example, a state and NAIC-regulated insurance company such as Investors Preferred, must comply with a myriad of consumer protection laws and safeguards, such as a “free-look” 100% refund policy cancellation right, short time frames on contestability, and claims payment deadlines. Additionally, NAIC filing and approval in each state of all insurance forms, including policy forms, applications, riders, etc. is required.
Conversely, my experience on behalf of law clients relating to obtaining assistance from the Bermuda insurance regulator’s office or regulators in other countries, has been dismal.
As if all of that wasn’t enough, additionally, each state, thru the NAIC, requires quarterly financial filings relating, of course, to adequate reserving and solvency but also relating to extensive accounting, reinsurance, policy issuance, premium received, claims paid out, claims pending, and outstanding disputed claims. In contrast, Bermuda’s filing is only yearly and is rather perfunctory compared to state and NAIC quarterly and in-depth annual filing requirements.
While the state and NAIC regulatory issues are extensive and expensive for a U.S. life insurance company to comply with, in the end, such regulatory oversight and processes provide much greater protection to the policy purchasing consumer. Such enhanced consumer protection greatly reaffirms my decision to create Investors Preferred domiciled in the United States and to move customers from Bermuda onshore to the United States.
JAY: There has been a recent resurgence of business in the PPLI market. Many would attribute this to the threat of increased taxation as well as some advancements in the PPLI industry – items like more flexible investment choices, the changes to IRC §7702 and the emergence of synthetic reinsurance. Where do you see the growth in the industry coming from?
ALAN: Regrettably, I think life insurance, including, and to a lesser degree, private placement life insurance, has historically been sold and not bought, as is commonly said. This is especially true for high commissioned permanent types of retail insurance. Less true for term insurance.
I see the life insurance industry moving to a much lower commission structure, with lower cost, fee-based types of products. I also see the life insurance industry evolving much like the mutual fund industry, where most mutual funds available today for investment are zero or nearly zero load products, with all costs being fully transparent and disclosed. Such was not the case as recent as probably 20 years ago in the mutual fund industry.
I think we will see commissioned life insurance agents being displaced more and more by technology based informational sources. This is already happening in the term insurance arena and with other types of insurance by technology-based companies such as Lemonade. I read an article whereby one can buy term life insurance via a phone app in less than 10 minutes!
I think fee-based compensation concepts such as annual small percentages of account value for producer compensation as compared to large upfront commissions with total disclosure of all costs, including all fees and commissions, are welcome trends, resulting in life insurance policies in the future being "bought rather than sold."
I am proud to state that the private placement life insurance industry has led the way in being transparent with open architecture as to pricing and investments and flexible investment options, already coming closer to being "bought not sold." The traditional cash value-oriented life insurance products, not being as open and transparent, seem to be lagging in that regard.
JAY: I can imagine we are going to hear from the retail side of the industry over your last answer! This question is one that I receive all the time when I discuss private placement life insurance and I’m certain you do, too. If PPLI is so fantastic, why don’t we see more of it sold?
ALAN: I think the reason the PPLI industry hasn't take off is the result of three factors:
First, because of the way the sales force is compensated. There is low or no commissions on policy sales, hence the traditional life insurance agent does not make a significant upfront income from PPLI sales and would rather sell a few commissioned policies compared to PPLI products.
Next, there is a lack of education about PPLI and only a few people like you and me are working to remedy this.
The last reason the PPLI industry hasn’t taken off like it should is the “I” word. PPLI is, after all, life insurance, and some high-net-worth clients and their advisors can't get past that simple fact and their dislike of traditional life insurance products.
If such high-net-worth clients and their advisors can invest a bit of time, keep an open mind, agree to learn about the benefits and investment flexibility of utilizing PPLI as an investment tool with a requisite death benefit, then often such clients become converts, and actually become ambassadors for PPLI planning.
Investors Preferred spends a significant amount of its marketing efforts on education of the advisor and the consumer including debunking perceptions that PPLI is just like any other traditional life insurance product.
JAY: I really appreciate hearing your perspectives on the private placement space, Alan – thank you. Fortunately, you don’t spend all your time running a life insurance company as you and your wife participate in a number of active leisure activities. Just to say that the two of you enjoy bicycling and sailing wouldn’t do justice to the level of commitment you have to these pastimes. Fill me in on these pursuits, including how you prepare for the ‘Ride the Rockies’ event.
ALAN: After law school in the early 1980s, I believed I could build a law practice anywhere, and therefore why not build a law practice in Denver, located on the edge of a mountain playground? I fell in love with Colorado and its mountains while in college and told myself that someday I was going to live there and was fortunate to be able to make that dream happen.
My wife, Cathy, and I share a passion for the beauty and splendor of the mountains and have enjoyed just about every mountain activity available, including downhill skiing, cross country and back country hut skiing, hiking, camping, backpacking, and bicycling - both road biking and mountain biking.
As to road biking, in our younger years, we participated in numerous week-long 400-to-500-mile bike rides in the mountains of Colorado, including Ride the Rockies and the Triple Bypass. Both require significant training for 2 to 3 months prior to the ride by riding approximately 1,000 miles in the mountains, including riding up significant mountain passes, such as Vail Pass, Loveland Pass, and Monarch Pass. The bike rides have been incredibly exhilarating and challenging, and I am blessed to share such adventures with Cathy.
As you know, sailing has been our latest endeavor, where we have recently sailed in Greece, in the Seychelles in the Indian Ocean, and the British Virgin Islands. Cathy is less enamored with sailing than the Colorado mountains, but she has been an amazing trooper in this latest adventure in our lives.
JAY: We have come to the restaurant question, Alan. I know you especially like the format because, as a life insurance company executive, you have purchased your fair number of steakhouse dinners. Without naming a steakhouse or a steak dish, name a restaurant that I shouldn’t pass up and what I should order when I eat there.
ALAN: It isn’t a problem to forgo the steak element with my answer! My favorite restaurant is in Scottsdale, AZ, located right beneath Camelback Mountain with just an incredible view of Camelback Mountain including an up-close view of a rock formation that looks like a praying monk on a camel's nose. The restaurant's name is Elements and is a part of the Sanctuary Resort. My wife and I go there whenever a celebration of some type is in order, and I can’t pass up the miso glazed wild isles salmon.
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.