Types of Permitted Investments Underlying a Private Placement Life Insurance Policy

August, 2023
Types of Permitted Investments

Private placement life insurance (PPLI) can permit a variety of investment types, depending on the insurance company offering the policy and the investment strategy chosen by the policyholder.

Some common types of investments that can be held within a PPLI policy include:

  1. Equities: PPLI policyholders can invest in stocks of publicly traded companies or private equity funds.
  2. Fixed Income Investments: These include bonds, fixed-income securities, and other debt instruments.
  3. Alternative Investments: PPLI policies can allow investment in alternative assets such as hedge funds, private equity, real estate, and commodities.
  4. Cash and cash equivalents: PPLI policies can hold cash and cash equivalents such as money market funds.

The Internal Revenue Code (“IRC”) lays out the treatment of variable life insurance and annuity contracts in Section 817 and authorizes two types of investments by a variable policy, including a PPLI policy:  an Insurance Dedicated Fund (IDF) and/or a Separately Managed Account (SMA). Registered investment advisors (RIAs) and fund managers typically engage fund administrators, such as industry leaders SALI Funds Services and Spearhead, LLC, to form IDFs and SMAs in order to attract PPLI policy investment.

Historically, until the last decade, IDFs were utilized almost exclusively as PPLI policy investments.  SMAs have emerged in popularity as RIAs and family offices have come to recognize the tax benefits of PPLI and seek to deploy customized portfolio strategies within policies.

Insurance Dedicated Funds

IDFs are private investment funds open to subscription to insurance carriers only for further allocation to PPLI policy accounts.  IDFs are stand-alone funds and must be separate legal entities from the life insurance carrier and its general account investments.

Structurally, IDFs have a number of important characteristics:

  • An IDF is a private fund formed as an LLC that is only open to subscriptions from life insurance companies on behalf of their issued private placement policies.
  • The number and asset value of an IDF’s investment positions must meet the Diversification Test for variable contracts.
  • Fund managers are permitted to create an IDF-equivalent of a taxable strategy they offer separately, as long as the investment decisions of the IDF are made by the advisor of such IDF in their sole and absolute discretion.
  • In general, the carrier or independent investment advisor engaged by the carrier will select IDFs for subscription on behalf of the policy.
  • Some carriers allow policy owners to influence the allocation of their policy’s investment funds among a pre-determined set, or platform, of carrier-approved IDFs.
  • Other carriers require IDFs to be selected by an independent investment adviser.
  • In all cases, policyowners may not direct or control the investment activity of an IDF held in their policy, directly or indirectly as directed by the Internal Revenue Code’s Prohibition Against Investor Control Doctrine.1
Diagram of IDF cost
IDF Cost

The cost to establish an IDF varies depending on whether a fund utilizes internal or external legal support in developing the legal structure. The industry norm is to engage a cost-effective vendor where set-up fees can be as low as $36,000.2

On-going administration fees for access to the vendor’s platform are based on an IDF’s assets under management (“AUM”) and are commonly in this range:

AUM:3 < $49,999,999 million is 0.15% per year;
$50 million to $149,999,999 million is 0.10% per year;
> $150 million is 0.05% per year;
subject to a minimum fee of $2,500 per month.

IDF costs do not include sub-advisor fees nor agent compensation.  These additional fees are also deducted from a PPLI policy’s cash value.

Separately Managed Accounts

A SMA allows an independent investment advisor to access the broadest possible range of investments for the policy account, including marketable securities, structured notes, ETFs, hedge funds, private equity and other alternative investment strategies.  Structurally, a SMA in a PPLI transaction is no different than a SMA an investor would purchase within their investment portfolio.  However, due to the tax benefits of a PPLI, a SMA comprised of highly tax-inefficient investments is commonly held under a policy.

SMAs are subject to the same diversification requirements and prohibition against investor control as IDFs.

Diagram of SMA cost
SMA Cost

On-going administration fees are based on an SMA’s AUM and are commonly in this range:

AUM:4 < $49,999,999 million is 0.10% per year;
$50 million to $149,999,999 million is 0.08% per year;
> $150 million is 0.06% per year;
subject to a minimum fee of $2,500 per month.

Pricing is generally “program-based” – based on a sub-advisor’s total assets across all policies.  SMA costs do not include investment management or sub-advisor fees nor agent compensation.  These fees are also deducted from a PPLI policy’s cash value.

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  1. 1 Webber v. Commissioner (T.C., No. 14336‐11, 144 T.C. No. 17, 6/30/15)
  2. 2 Judas, J. C., & Fontanini, M. (2022, January 20). PPLI Market Report. Retrieved February 19, 2023, from https://www.lifeinsurancestrategiesgroup.com/post/u-s-ppli-market-report
  3. 3 Judas, J. C., & Fontanini, M. (2022, January20). PPLI Market Report. Retrieved February 19, 2023, fromhttps://www.lifeinsurancestrategiesgroup.com/post/u-s-ppli-market-report
  4. 4 Judas, J. C., & Fontanini, M. (2022, January 20). PPLI Market Report. Retrieved February 19, 2023, from https://www.lifeinsurancestrategiesgroup.com/post/u-s-ppli-market-report.  Spearhead will charge the Sub-Advisor a one-time retainer of $5,000 upon engagement to draft the SMA’s legal documentation, complete Sub-Advisor due diligence and background checks, and to onboard the SMA Sub-Advisor onto the appropriate insurance carrier investment platform(s).  This fee is credited back to the Sub-Advisor against Spearhead’s monthly administration fee.

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