private placement life insurance & variable annuities forum · key assumptions: 1. annual premium...

Private Placement Life Insurance & Variable Annuities Forum

Hyatt Centric Magnificent MileChicago, IllinoisJune 13, 2018

www.pinnaclefinancialconsultants.com

This is for educational purposes only and not a solicitation. Not for the general public.

Carrier Selection: Domicile, Structure, & Rating

Panelists: Ken Masters

www.pinnaclefinancialconsultants.com

Carrier Considerations

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Investment Offerings/Flexibility

Capacity & Underwriting

Policy Expenses & Fees

Commitment to PPVUL/PPVA

Ratings/Carrier Financials

It’s All About the Investment…

• Before discussing carrier selection, domicile, and design, client or advisor must decide on desired investment(s)

• Carrier selection and product design will follow based on identified investment strategies– Potential decision tree may alter based on availability of desired

investments or strategy

• Our starting assumption is that the considered investment is tax inefficient so a private placement vehicle makes economic sense

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Key Investment Decision Gates

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Separately Managed Account (“SMA”) or Insurance Dedicated Fund (“IDF”)

SMA/IDF Approval Process

Illiquid Investment Capability

PresenterPresentation NotesSMA vs. IDF for oneComfort with illiquid holdingsExisting IDF investor or Private Bank ClientPlanning integration

PPVUL or PPVA Considerations

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• Who’s Perspective• Tax Deferral or Elimination

What is the End Goal?

• Ownership Implications• Estate/Charitable Planning

Planning Integration

• Desired Investment• Underwriting ConstraintsCapacity

PPVUL Economics

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Pre-Tax Acct. Value Death Benefit

Year 10 $35,308,187 $43,075,988

Year 20 $72,594,340 $77,675,944

Year 30 $149,204,477 $156,664,701

Key Assumptions:1. Annual premium of $5M payable for 4 years, i.e. $20M cumulative.2. Annual assumed 8.00% net return and assumes current non-guaranteed charges.3. Investor is assumed to be a 55-year-old preferred non-smoker male.4. PPLI policy uses the Alaska state premium tax, single carrier proxy, and standard Pinnacle pricing.5. Please refer to carrier illustrations for additional disclosures. Illustrations provided upon request.

For a taxable beneficiary, PPVUL provides tax-free death benefit.

PresenterPresentation NotesTitan Advisors Example

PPVA Economics

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Pre-Tax Acct. Value Death Benefit

Year 10 $37,332,490 $27,955,613

Year 20 $78,183,098 $46,706,042

Year 30 $163,894,800 $86,047,713

Key Assumptions:1. Annual premium of $5M payable for 4 years, i.e. $20M cumulative.2. Annual assumed 8.00% net return and assumes current non-guaranteed charges.3. Investor is assumed to be a 55-year-old preferred non-smoker male.4. Annuity death benefit proceeds assumes California state income tax rate.

For a taxable beneficiary, PPVA death benefit proceeds are subject to ordinary income tax.

PresenterPresentation NotesTitan Advisors Example

Domestic vs. Offshore Considerations – U.S.

• When considering using PPVUL, a U.S. citizen and resident would most likely use a U.S. domestic policy or dual-compliant policy

• In the past, U.S. persons had been recommended using offshore policies for the following reasons which no longer apply:– Asset protection planning purposes– Favorable economics– Lack of clarity regarding domestic policy compliance

• Exception would be for payments in-kind…maybe

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Domestic vs. Offshore Considerations - NRA

• When considering using PPVUL, a non-U.S. non-resident alien (“NRA”) has three primary options:– U.S. domestic policy assuming sufficient U.S. nexus to qualify for

coverage – Non-U.S. policy issued by a carrier making a 953(d) election and policy

complies with U.S. tax law– Non-U.S. policy issued by a carrier not making a 953(d) election, i.e.

offshore policy• Policy may be structured to comply with U.S. insurance tax law or

not

• In general, a non-U.S. insured would use a domestic policy if there was a U.S. beneficiary, sufficient U.S. nexus, and intention to make U.S. investments

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Domestic vs. §953(d) vs. International PPVUL

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Taxation U.S. Investments

U.S. Taxes on Foreign Policy Owners

U.S. Tax Treatment Death Benefit to U.S. Beneficiary

InvestorControl Doctrine

UNI/DNI Implications for U.S. Beneficiary

U.S.Domestic Policy

Generally Exempt

30% W/H on MEC Distributions or Policy Surrenders

Income & Capital Gains Tax-Free

Yes No

§953(d) Carrier

Generally Exempt Yes No

OffshorePolicy

Generally Exempt; 30% FIRPTA W/H

No U.S. W/H Tax on Distributions

Not Taxable if Deemed Insurance in Issuing Jurisdiction

NoYes – ForeignNon-Grantor Trust

Underwriting Considerations

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• Writing carrier retains risk• Carrier has full discretion

Internal Retention

• Writing carrier can bind reinsurer• Must conform to reinsurance treatyAutobind

• Reinsurer must pre-approve• Writing carrier has no discretionFacultative

PresenterPresentation NotesImpact on carrier selectionValue provided by competent brokerWho is good at what from an underwriting perspectiveNot apply to PPVA

Policy Fees & Expenses

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Fee Recipient Paid With Amount

Premium Tax Insurance Company Assessments Against Each Premium2.00% of Premium on Average by State with Delaware, Alaska, and South Dakota being

below 10 bps

Deferred Acquisition Cost

(DAC) TaxInsurance Company Assessments Against Each Premium Usually 1.00% of Premium

Mortality &Expense (M&E)

Charge

Insurance Company & Insurance Advisor

Monthly Assessments Against Cash Value

Typically Scaled by Asset Size and Duration (i.e., 0.25% of cash value per year for first 10 years; 0.20% for second 10 years; 0.15% thereafter)

Cost of Insurance (COI) Charge Insurance Company

Monthly Assessments Against Cash Value

Variable Depending on Net Amount at Risk, Age, Sex, and Healthiness of Insured

Compensation Insurance AdvisorInitial Premium

and/or Cash Value (Part of M&E)

Front End – 0.50% to 3.00% depending on broker

Trail Compensation – 0.10% to 0.50% of cash value per annum

PresenterPresentation NotesAll carriers have similar pricing constraints, so just where put the cost. A lower DAC may be made up for in a higher M&E etc.Exceptions include Great West’s bundled M&E policy and Lombard CatalystNew York Life additional 10 bp fund fee for formationBeware of outliers…

Commitment to PPLI/PPVA Market

• Example of carriers that have exited the market– American General – Hartford– Mass Mutual– New York Life– Sun Life

• What we have observed with clients who have legacy policies with inactive carriers:– Increased policy expenses (American General)– Limited IDF options & unwillingness to add new funds– No infrastructure investment by carrier

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PresenterPresentation NotesLack of economic incentive to make exceptions, re-underwrite, or improve pricingOptically just looks bad to the clientPotential for adverse policyholder selectionDifference between PPLI vs. PPVA due to barrier entry with PPLI

Commitment to PPLI/PPVA Market (cont’d.)

• Key questions to ask– Is this the carrier’s only line of business

• Amount of premium (relative importance)– What is the carrier’s ownership structure– Current breadth of IDF offerings and approval process– Ability to accommodate SMAs and potential future consideration– Any recent infrastructure investments/upgrades

• Potential impact of ownership structure– Stock vs. Mutual insurance company– Private equity backing– U.S. subsidiary of foreign holding company

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PresenterPresentation NotesDifference in valuation – Lombard valued as asset management firm vs Prudential values as insurance carrier

Carrier Ratings (sample)

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Crown Lombard Prudential Zurich

A.M. Best B++ (5) A- (4) A+ (2) A+ (2)

S & P Not Rated Not Rated AA- (4) A (6)

Moody’s Not Rated Not Rated A1 (5) A3 (7)

Fitch Not Rated Not Rated AA- (4) Not Rated

1. Ratings information from Vital Signs as of May 1, 2018.

PresenterPresentation NotesCrown – Admitted Assets $583.7M, Separate acct $582.0M, PPLI/PPVA premium $12.9MLombard – Admitted Assets $6.5B, Separate acct $6.4B, PPLI/PPVA premium $381.6MPrudential – Admitted Assets $16.0B, Separate acct $14.3B, PPLI premium $172.3MZurich – Admitted Assets $14.2B, Separate acct $13.4B, PPLI/PPVA premium ???Speak to relative sizes and premiums writtenRick Plate to provide approximate profitability measures of PPLI vis-à-vis other products

A.M. Best Ratings

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Rating Definition

Best’s CreditRating (BCR)

A forward-looking, independent, and objective opinion regarding an insurer's, issuer's, or financial obligation's relative creditworthiness. The opinion represents a comprehensive analysis consisting of a quantitative and qualitative evaluation of balance sheet strength, operating performance, and business profile or, where appropriate, the specific nature and details of a security.

Best’s Issuer Credit Rating (ICR)

Independent opinion of an entity’s ability to meet its ongoing financial obligations and can be issued on either a long- or short-term basis. An ICR is an opinion regarding the relative future credit risk of an entity. Credit risk is the risk that an entity may not meet its contractual financial obligations as they come due. An ICR does not address any other risk. An ICR is not a recommendation to buy, sell, or hold any securities, contracts or other financial obligations, nor does it address the suitability of any particular financial obligation for specific purpose or purchaser.

PresenterPresentation NotesCrown – Admitted Assets $583.7M, Separate acct $582.0M, PPLI/PPVA premium $12.9MLombard – Admitted Assets $6.5B, Separate acct $6.4B, PPLI/PPVA premium $381.6MPrudential – Admitted Assets $16.0B, Separate acct $14.3B, PPLI premium $172.3MZurich – Admitted Assets $14.2B, Separate acct $13.4B, PPLI/PPVA premium ???Speak to relative sizes and premiums writtenRick Plate to provide approximate profitability measures of PPLI vis-à-vis other products


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What Do Ratings Mean

• Insurance carrier ratings are generally used by purchasers of insurance carrier debt to determine creditworthiness of debt issues

• Ratings and ratings reports also used as a proxy for carrier’s claims paying ability to policyholders

• Can also look to stock reports of publicly traded insurance company’s as an additional gauge to financial strength– Statutory vs. GAAP vs. IFRS accounting standards

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PresenterPresentation NotesMost clients do not even ask for about ratingsNY Life was triple A-rated carrier; not help PPLI clients

Separate Account Protection

• PPLI/PPVA account assets are generally held in SMAs, IDFs, or available registered funds on the carrier’s platform

• These investments are collectively deemed “separate accounts” and are not commingled in the insurance carrier’s general account– Not subject to the claims of the insurance carrier’s general

creditors

• Mutes concern of financial carrier insolvency but does not fully eliminate it

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PresenterPresentation NotesGet statutory statements

Separate Account Protection (cont’d.)

• Net premium payments held in a “separate account” established by the carrier pursuant to state insurance statute

• The income, gains and losses, realized or unrealized, from assets allocated to a separate account are credited to or charged against such account, without regard to other income, gains or losses of the carrier

• The portion of the assets of any such separate account equal to the reserves and other contract liabilities with respect to such account are not chargeable with liabilities arising out of any other business the carrier may conduct

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Relevance to PPLI/PPVA Purchaser

• “Eye of the beholder” question

• Optics for client and advisor

• All else being equal, preference for higher rated, larger carrier

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PPLI Investment – Accredited Investors

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An accredited investor is defined in Rule 501 of the Securities Act of 1933 (“Act”) as follows:

Accredited investor shall mean any person who falls within any of the following categories, or who the issuer reasonably believesfalls within any of the following categories, at the time of the sale of the securities to that person:

•Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of theSecurities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act; any investment companyregistered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of thatAct; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of theSmall Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency orinstrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of$5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if theinvestment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loanassociation, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of$5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;•Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;•Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business, trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000•Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;•Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000, excluding the value of the individual's primary residence;•Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income withthat person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income levelin the current year;•Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whosepurchase is directed by a sophisticated person as described in Rule 506

PPLI Investment – Qualified Purchasers

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A qualified purchaser, which is one who requires a higher suitability standard than that of accredited investor, is defined in Section2(a)(51) of the Investment Company Act of 1940 as:

•Any natural person (including any person who holds a joint, community property, or other similar shared ownership interest in anissuer that is excepted under section 3(c)(7) [15 USCS § 80a-3(c)(7)] with that person's qualified purchaser spouse) who owns no lessthan $5,000,000 in investments, as defined by the SEC;

•Any company that owns no less than $5,000,000 in investments and that is owned directly or indirectly by or for two (2) or morenatural persons who are related as siblings or spouse (including former spouses), or direct lineal descendants by birth or adoption, thespouses of such persons, the estates of such persons, or foundations, charitable organizations, or trusts established by or for the benefitof such persons;

•Any trust that is not covered by the preceding clause and that was not formed for the specific purpose of acquiring the securitiesoffered, as to which the trustee or other person authorized to make decisions with respect to the trust, and each settlor or other personwho has contributed assets to the trust, is a person described in clause (1), (2), or (4); or

•Any person, acting for his or her own account or the accounts of other qualified purchasers, who in the aggregate owns and invests noless than $25,000,000 in investments on a discretionary basis.

Disclosures

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Private Placement Life Insurance is an unregistered securities product and is not subject to the same regulatory requirements as registered variable products. As such, Private Placement Life Insurance should only be presented to accredited investors or qualified purchasers as described by the Securities Act of 1933. Any offer of sale must be proceeded or accompanied by the current offering memorandums for the separate account and completion of the investor qualification questionnaire.

The policy values reflected herein assume current policy charges, current cost of insurance rates, current mortality and expense riskcharges, average fund expenses (unless noted otherwise) and the stated hypothetical gross (net) rate of return.

The policy values are hypothetical for illustration purposes only and may not be used to project or predict investment results. Policyvalues will vary based on the actual performance of the sub-account investments selected, actual insurance charges over the life of thplan and the timing of the premium payments.

Loans and partial withdrawals (if applicable) will decrease the death benefit and cash value and may be subject to policy limitationsand income tax.

Product guarantees, including the death benefit, are subject to the claims-paying ability of the issuing insurance company.

Private Placement Variable life insurance products are long-term investments and may not be suitable for all qualified investors. An investment in variable life insurance is subject to fluctuating values of the underlying underlying investment options and it entails risk, including the possible loss of principal. Investors should consider the investment objectives, risks, charges and expenses of any Private Placement Variable life insurance policy carefully before investing. This and other important information about the policy is contained in the offering memorandums, which will be provided by Pinnacle Financial Group or upon request.

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Private Placement Life Insurance is an unregistered securities product and is not subject to the same regulatory requirements as

registered variable products. As such, Private Placement Life Insurance should only be presented to accredited investors or qualified

purchasers as described by the Securities Act of 1933. Any offer of sale must be proceeded or accompanied by the current offering

memorandums for the separate account and completion of the investor qualification questionnaire.

The policy values reflected herein assume current policy charges, current cost of insurance rates, current mortality and expense risk

charges, average fund expenses (unless noted otherwise) and the stated hypothetical gross (net) rate of return.

The policy values are hypothetical for illustration purposes only and may not be used to project or predict investment results. Policy

values will vary based on the actual performance of the sub-account investments selected, actual insurance charges over the life of the

plan and the timing of the premium payments.

Loans and partial withdrawals (if applicable) will decrease the death benefit and cash value and may be subject to policy limitations

and income tax.


Private Placement Variable life insurance products are long-term investments and may not be suitable for all

qualified investors. An investment in variable life insurance is subject to fluctuating values of the underlying

underlying investment options and it entails risk, including the possible loss of principal.

Investors should consider the investment objectives, risks, charges and expenses of any Private Placement

Variable life insurance policy carefully before investing. This and other important information about the

policy is contained in the offering memorandums, which will be provided by Pinnacle Financial Group

or upon request.

This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to

replace the advice of a qualified attorney, tax advisor or plan provider. Pursuant to IRS Circular 230, please be advised that the information

contained in this document is not intended to and cannot be used by anyone to avoid IRS penalties.

&"Garamond,Bold"&18"IT'S A MATTER OF STRATEGY."&"Garamond,Bold"&14&P

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Important Disclosures (cont'd.)

Estate Planning Insurance Coverage Review

The performance data contained within this presentation (if applicable) represents past performance, which does not guarantee

future results. For year to date performance figures as of the most recent month-end, please contact our office. Investment return

and principal value will fluctuate so that account values, if/when redeemed, may be worth more or less than the initial premium paid.

The subaccount performance shown reflects all underlying fund fees and expenses. However, the premium charge, the daily and

current monthly mortality and expense risk charge, the cost of insurance, and surrender charges are not reflected; and if they had been

reflected, the performance shown would be reduced. Please refer to the hypothetical illustrations in the product's prospectus to see

how fees can impact performance. Policyholders and potential policyholders should request a personalized illustration that reflects

all applicable fees and charges.

Note that the hypothetical illustrations contained herein are for informational purposes only to show how the performance of the

underlying investment accounts could affect the policy cash value and death benefit. These illustrations are hypothetical and may

not be used to project or predict investment results.

The internal rate of return on the death benefit is equivalent to an interest rate (after taxes) at which an amount equal to the illustrated

premiums could have been invested outside of the policy to arrive at the death benefit of the policy. The internal rate of return on the

surrender value is equivalent to an interest rate (after taxes) at which an amount equal to the illustrated premiums could have been

invested outside the policy to arrive at the surrender value of the policy.

Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC.


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Private Placement Life Insurance is an unregistered securities product and is not subject to the same regulatory requirements as

registered variable products. As such, Private Placement Life Insurance should only be presented to accredited investors or qualified

purchasers as described by the Securities Act of 1933. Any offer of sale must be proceeded or accompanied by the current offering

memorandums for the separate account and completion of the investor qualification questionnaire.







and income tax.

Disclosures

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Note that the hypothetical illustrations contained herein are for informational purposes only to show how the performance of thunderlying investment accounts could affect the policy cash value and death benefit. These illustrations are hypothetical and manot be used to project or predict investment results.

The internal rate of return on the death benefit is equivalent to an interest rate (after taxes) at which an amount equal to the illupremiums could have been invested outside of the policy to arrive at the death benefit of the policy. The internal rate of return surrender value is equivalent to an interest rate (after taxes) at which an amount equal to the illustrated premiums could have binvested outside the policy to arrive at the surrender value of the policy.

Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services offered through Pinnacle Pension Consultants, LLC. Pinnacle Financial Group is independently owned and operated.

This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended replace the advice of a qualified attorney, tax advisor or plan provider. Pursuant to IRS Circular 230, please be advised that the icontained in this document is not intended to and cannot be used by anyone to avoid IRS penalties.

File #0758-2018

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Important Disclosures

Estate Planning Insurance Coverage Review

Variable life insurance products are long-term investments and may not be suitable for all investors. An investment in variable life

insurance is subject to fluctuating values of the underlying investment options and entails risk, including the possible loss of principal.

The performance of a policyholder's account value will vary and the policyholder may receive more or less than the amount invested.






Please refer to the complete insurance carrier illustration for illustrated values assuming maximum policy charges and a 0% return.


and income tax.


Investors should consider the investment objectives, risks, charges, and expenses of any variable life insurance product

carefully before investing. This and other important information about the investment company is contained in each product's

prospectus, which will be provided by Pinnacle Financial Group or upon request. Please read it carefully before investing.





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Investment Advisory Services offered through Pinnacle Pension Consultants, LLC.

Pinnacle Financial Group is independently owned and operated.





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Investment Advisory Services offered through Pinnacle Pension Consultants, LLC.

Pinnacle Financial Group is independently owned and operated.

Private Placement Life Insurance & Variable Annuities ForumCarrier Selection: Domicile, Structure, & RatingCarrier ConsiderationsIt’s All About the Investment…Key Investment Decision GatesPPVUL or PPVA ConsiderationsPPVUL EconomicsPPVA EconomicsDomestic vs. Offshore Considerations – U.S.Domestic vs. Offshore Considerations - NRADomestic vs. §953(d) vs. International PPVULUnderwriting ConsiderationsPolicy Fees & ExpensesCommitment to PPLI/PPVA Market Commitment to PPLI/PPVA Market (cont’d.) Carrier Ratings (sample) A.M. Best RatingsCarrier ConsiderationsCarrier ConsiderationsWhat Do Ratings Mean Separate Account Protection Separate Account Protection (cont’d.) Relevance to PPLI/PPVA Purchaser PPLI Investment – Accredited InvestorsPPLI Investment – Qualified PurchasersDisclosuresDisclosures

private placement life insurance & variable annuities forum · key assumptions: 1. annual premium...

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