A Private Placement Variable Annuity (PPVA) is the use of an annuity structure by an accredited investor and/or qualified purchaser to apply the tax benefits of an annuity to one or more single investments or to a customized portfolio.1 A PPVA recharacterizes a highly tax-inefficient investment as an annuity so that the investments underlying the policy can grow tax-deferred until the investments are accessed as annuity income in the future.
PPVAs share many of the same attributes and are covered by much of the same legislation and regulations as private placement life insurance (PPLI) but differs in structure and some applications. As an annuity, PPVA does not contain a life insurance death benefit component, and this means there is no medical underwriting and there are no premium limitations resulting from how much death benefit risk the insurance company can provide for each policy. Therefore, a PPVA contract holder can make unlimited contributions.
A PPVA differs from a traditional annuity in much the same way a PPLI policy differs from traditional life insurance. The insurer is responsible for arranging the annuity structure, leaving the choice of investment manager and custodian to the contract holder. The investment manager then instructs the insurance company on what underlying investments to make for the annuity. As with PPLI, the investments in a form of an Insurance Dedicated (Fund) or a Separately Managed Account (SMA) underlying a PPVA are held separate from the general account of the insurer and not subject to the insurer’s creditors.2
Unlike a traditional annuity, a PPVA does not have features such as income guarantees or principal protection. As a result, PPVAs generally have substantially lower fees.
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