Private Placement (Accredited Investors Only)
Private placement insurance is only available to Accredited Investors. To be considered an Accredited Investor, one must have a net worth of at least $1,000,000, excluding the value of one’s primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year.
Private placement (or non-public offering) is the offering and sale of a security by a brokerage firm not involving the general public, but rather through a private offering, mostly to a group of sophisticated investors who are categorized as Accredited Investors or Qualified Purchasers. Available in many forms, the type offered through RetireOne is offered under the SEC Rules known as Regulation D, rule 506. Private placement has advantages including: a) Often less complexity than a registered product; b) Often less costly to implement and maintain; c) Less burdensome regulatory requirements; and d) Bespoke Solution – custom designed for each individual investor.
There are two types of Private Placement insurance. Private Placement Life Insurance is a form of variable universal life insurance having two components, an investment account and a death benefit. Private Placement Variable Annuity (“PPVA”), is a form of a variable annuity, and is a life insurance contract whose investment account value fluctuates with the portfolio of underlying assets. Both are offered privately to Accredited Investors and Qualified Purchasers.
Primarily private placement insurance establishes a tax-free investment environment, at a very low cost, where there are a number of investment alternatives. In the case of private placement variable universal life insurance, the death benefit value of the policy is generally considered a secondary benefit. For the private placement products offered through RetireOne, the investment advisor manages the assets in the insurance policy.
- All earnings are tax deferred, including dividends, interest, capital gains, and partnership income.
- Optimize performance with transparent, lower asset-based costs
- Explore investment options in alternative asset classes
- Increased access to leading managers
- Elimination of K-1 tax reporting
- No surrender charges
For private placement variable universal life insurance, in addition to the above benefits:
- Tax-free access to cash value through withdrawals up to cost-basis
- Tax-free access to cash value through policy loans
- Policy beneficiaries receive policy proceeds on a tax-free basis at the death of the insured.
Private placement variable annuities and variable universal life are fully recognized by the IRS. The favorable tax treatment of private placement life insurance for both the policy owner and the beneficiary of the death benefit has been firmly established in the Internal Revenue Code for decades. Tax-deferred growth is recognized and unchallenged by the IRS, thus investments inside the investment account grow at a much faster rate than taxable investments. Tax-free access to portions of the investment accounts are also well defined by the IRS.
Source: Revenue Ruling 2003-91, Revenue Ruling 2003-92, PLR 200420017, PLR 9433030, PLR 201105012, CCA 200840043.
For private placement variable annuities and variable universal life insurance offered through RetireOne, the custodian can be chosen by the financial advisor with the approval of the insurance company. This allows the financial advisor to manage the assets covered by the insurance as part of their general portfolio management.
Investment advisors and their clients must comply with investor control rules as they make investment selections. The policy owner is prohibited from exercising: a) the power to direct investments of the funds; b)the power to vote shares and exercise other options with respect to underlying securities of the funds; c) the power to extract cash at will from the policy’s separate accounts; and d) the power in any other way to derive “effective benefit” from the investments in the separate accounts. Source: August 13, 2015 WRNewswire.
Asset in an annuity or life insurance contract must be adequately diversified at the end of every calendar quarter. In general the investments of will be considered diversified if: a) No more than 55% of the value of the total assets of the account is represented by any one investment; b) No more than 70% of the value of the total assets of the account is represented by any two investments; c) No more than 80% of the value of the total assets of the account is represented by any three investments; and d) No more than 90% of the value of the total assets of the account is represented by any four investments. All securities of the same issuer, all interests in the same real property project, and all interests in the same commodity will be treated as a single investment. In the case of government securities, each government agency or instrumentality will be treated as a separate issuer.
A Participation Agreement must be in place between the investment advisory firm and the insurance company. A Participation Agreement (PA) allows the advisor to manage the insurance private placement assets. Each investment advisory firm will require one Participation Agreement at the firm level only, which will enable the appropriate investment professionals within the firm manage the private placement assets. A principal of the firm is required to sign on behalf of the firm. The Participation Agreement covers the following topics: appointment, confidentiality, account assets, term and termination, investment guidelines and objectives, custody of account assets, powers and duties of the investment advisor, fees and expenses, withdrawals. Investment Advisors should add (Insurance Companies) to their ADV, item 5D1L.