Private Placement Life Insurance

Oct 7 • Finance • 689 Views • Comments Off on Private Placement Life Insurance

In reviewing the different types of life insurance available to you, you may have seen the option of what is called private placement insurance. And if you have investment income, this option can offer you a number of benefits.

What Is Private Placement Life Insurance?
Private placement life insurance is offered from a carrier other than one that offers traditional life insurance. A type of variable universal life insurance, private placement can provide you with the means to generate tax-free income with no reporting requirements from your capital gains or taxable income.

Private placement allows you to capitalize on income tax benefits in three ways:

–          By providing your beneficiaries with a tax-free death benefit;

–          By not requiring taxes be paid on any withdrawals from the policy;

–          By allowing you to accumulate tax-free earnings on your dividends, interest and capital gains.

What Are The Premiums of a Private Placement Policy?
This type of policy usually protects assets in the amount of one million dollars or more. Premium amount is usually representative of one half of the policy holder’s net worth, and can be anywhere from ten to forty percent of total net worth. Premiums can be paid in increments during the policy’s early years, or paid in one sum.

Difference Between Private Placement And Other Insurance Types
While a more traditional life insurance policy may only require a home visit to review and sign the papers, a private placement policy usually involves a team of qualified professionals. Private placements are highly customizable, and as a result, require a high level of attention to detail.

The planning team in a private placement scenario concentrates on four areas of the process, which are:

–          Investment research;

–          Financial underwriting;

–          Offshore and domestic cost/benefit analysis;

–          Insurance underwriting.

Private placement policies also offer a wider range of investment options than their traditional counterparts. Real estate investment trusts, hedge funds and private equity are a few examples. Those considering private placement may be interested to know that the type of investments able to be managed within a private placement policy are unlimited. As well, this type of policy can offer a level of financial privacy and creditor protection that traditional life insurance cannot.

Another difference between private placement and traditional life insurance is that it can be obtained from non-U.S. carriers. Because private placement firms rarely advertise their services, the costs to obtain such a policy can be reduced.

Risks of Private Placement
As with any purchase, there are inherent risks to private placement life insurance. One example is regulation. Although laws do exist in the United States and elsewhere, the environment in which regulation occurs will differ with location, which could mean more risk should a policy be purchased from a provider in another country.

There are also a number of investment performance risks with the private placement scenario. For example, any investments made using the policy’s cash value may not generate any profit should an investor’s chosen fund not perform as expected. If this happens, shares will have to be sold, likely at a loss.

Those looking for complete financial privacy may not find it with private placement, as the IRS does regulate how different life insurance policies are taxed, and monitors investor control.

Qualification is required for private placement. The would-be policy holder must meet the SEC requirements for an accredited investor.

Benefits of Private Placement
In addition to the benefits mentioned above, private placement also offers other benefits. As far as fees and expenses, private placement offers more competitive fees and expenses than do traditional offerings.

As well, properly structured policies will incur an annual cost that comes in at a fraction of the annual tax incurred by similar investments in a taxable environment.

Private placement can offer a way for the affluent individual to preserve, and not erode their capital, capital which was probably gained over years of hard work. When compared with other investment strategies which double wealth at the risk of capital erosion, private placement offers far less of a gamble.

Guest author Adam Foley writes on a variety of topics, but is particularly well-versed on the topic of life insurance companies.  He is a frequent contributor at The State Insurance Guide.

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