It should not be news to hear that Registered Investment Advisors (RIAs) are increasingly embracing life insurance, specifically private placement life insurance (PPLI) and private placement variable annuities (PPVAs). Logic dictates that RIAs would be huge advocates for a way to defer, reduce and eliminate taxation for clients by marrying life insurance structures with their investment strategies.
Unfortunately, the way PPLI & PPVA have traditionally been marketed in the U.S. – to life insurance producers – meant that RIAs had to have ties to these producers and that there were enough life insurance producers who understood private placement to serve the RIA community. Neither of these have been true.
Today, private placement carriers are working directly to form relationships with RIAs and then to include professional life insurance producers to handle the underwriting process. Carriers are no longer sitting on the sidelines and hoping RIAs come to them and proactively sending the message, “We have the structures to help your clients grow their holdings!”
In the U.S., fee-based financial advisors, RIAs, continue to take market share and break away from brokers. According to Tiburon Strategic Advisors, in 2021, there were 32,480 fee-based financial advisors in the U.S, up from 20,851 in 2004. These advisors hold $5.9 trillion under management, up $50 billion in just 2021 alone. Back in 2004, RIAs held only $900 million!
When combining this rapid AUM growth with the likelihood that the U.S. will see tax increases due to massive COVID-19-related spending, RIAs need to consider how they can slow down tax leakage to preserve AUM while continuing to deploy their investment strategies. PPLI and PPVA can do this.
While insurance dedicated funds (IDFs) where historically the popular investment choice under private placement products, the investment option growing in popularity is a separately managed account (SMA). Permitted by IRC §817(h)(5), the use of an independent investment manager with a discretionary mandate to choose and manage the investments under a policy is a no-brainer for a RIA. As liquidity becomes available, why not recreate a client’s effective investment strategy under a policy wrapper – especially where there are highly tax-inefficient assets?
This is exactly the appeal for RIAs and how they are using private placement policies. By creating new SMAs which mirror existing strategies, RIAs can now reduce, defer and eliminate taxes for their clients. As a bonus, RIAs can charge for the SMA just as they would for most other investment options. The result is an increase in revenue from the boost to non-taxed AUM and the fees from deploying SMAs for policies.
Where clients are unlikely to access their investments and plan on passing them to their heirs, it does not make sense to continue to pay taxes on this capital’s appreciation. When investments are held under a life insurance structure, they can be passed to heirs as part of the policy’s income tax-free death benefit. In effect, no tax was paid on the deferral and no tax was paid on the transfer of the investments. Plus, the transfer came with a step-up in basis – another benefit since the traditional step-up in basis at death for investments is occasionally under attack by Congress.
If a client is uninsurable or plans to access their investments, a PPVA may be the way to go. Yes, the client will pay taxes at ordinary rates on the growth portion of any annuity distribution. However, the math may be on their side when considering the tax deferral that occurs inside the annuity and the number of years the annuity is held. The long-term nature of an RIA account often fits hand-in-glove with using a PPVA.
Which insurance companies are permitting the inclusion of SMAs under their policies? Most U.S. domestic carriers and those offshore carriers making a §953(d) election to be treated as a U.S. taxpayer are accepting SMAs – with minimum policy size ranging from $5 million to $10 million. Included are:
Providence Life Assurance (Bermuda) Ltd.
Crown Global Insurance Group (U.S. & 953(d) carriers)
Investors Preferred Life Insurance Company of South Dakota
Evergreen (Bermuda) Ltd.
Lombard International Assurance
At Life Insurance Strategies Group, we help RIAs incorporate the use of PPLI and PPVA. We do not sell products, and this permits us to offer unbiased and pragmatic advice to our RIA partners as they work to enhance their clients’ portfolios and increase revenue.
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.