PPLI: The Ultimate Christmas Present

Dear Mountaineers,

Scott SchamberFor many years, we’ve touted “PPLI”, or Private Placement Life Insurance, as one of the best investment tools for those seeking asset protection, access to international investments, tax advantages, and unique estate planning possibilities, amongst many other benefits.

In fact, we could really make a great case that PPLI is one of, if not THE last offshore investment solutions available that ticks so many of the boxes that investors, and particularly US investors, would be looking for in preserving and growing their wealth.

But, as any of you that have followed us for a long time probably know, explaining PPLI can get quite technical and difficult to explain.

With the Christmas holiday upon us, I thought I would take the opportunity to try and compare PPLI to something many of us can relate to this time of year: a Christmas present. In this case though, I’m going to explain the benefits of PPLI in terms of a Christmas present you would need to package and send through the post (and as many Americans will appreciate, considering the USPS, that’s quite a challenge to do).

Before I try to simplify the concept of PPLI by using this holiday icon, I need to remind you that PPLI can consist of a number of different types of “insurance” policies: it can include deferred variable annuities, variable whole-of-life, universal variable life policies, MEC, non-MEC, and other variations of variable insurance products. For the sake of my attempt at a simplistic analogy, I’m just going to look at PPLI as a whole, because the structure remains basically the same for the different types of insurance-based investments that fall under “PPLI”.

For the sake of our “Christmas present” today, we need to start with the very basics. PPLI consists of three components: The insurance policy, the custodian bank, and the 3rd party asset manager/assets being invested in. Let’s work ourselves from the outside in, just the same as we would actually advise you and structure it for you.

The WRAPPING PAPER, or the insurance policy itself

Using the word “Wrapper” is very appropriate for PPLI, as they are quite frequently referred to as “insurance wrappers”.

When choosing the wrapping paper to a Christmas present, and especially one that we are going to ship through the post, what are you looking for? You are looking for something to reflect the gift, i.e. you want it to be Christmas-festive, but also fit to the recipient. In other words, you won’t send Christmas paper with Santa driving a toy train, comical-looking reindeer, and candy canes to 6-foot, 2-inch tall, 250 pound “Uncle Bob”. Clearly you need to match the wrapping paper to the recipient.

Since we are sending this package through the post, we need to make sure it is solid, dependable, and capable of standing up to the handling it will go through on its way. You don’t want to use the same wrapping paper you would use if you were just going to put the present underneath the tree. Instead, you need to use paper that is made for shipping; it needs to be sturdy.

Similarly, when choosing the insurance company for PPLI, we want to look for the insurance company and the policy type that best match your situation and objectives. Questions like how much life insurance do you really need, would you like to have annuity payments for retirement planning purposes, or are you primarily looking to inherit the assets tax-efficiently to your children, how old, how healthy are you, etc.

We also want to make sure the insurance company is strong and capable, and that they have a history of working with clients like you. We don’t necessarily need the biggest insurance company – in fact, smaller carriers that you may have not heard of before, with their sole strategic focus on these types of policies can be safer than the big household names, since they are not exposed to the same kind market risks – but we need to know they are reliable and trusted partners.

At the insurance level, and particularly for US investors, it’s also very important to have a company that knows US clients. For example, an insurance company that knows the reporting needs and importance of proper PPLI structuring for a US investor will help ensure things are done correctly from the start and that US rules/regulations are kept up-to-speed on during the entire policy’s lifetime.

The BOX holding the actual present, or the custodian bank account for the insurance policy

When choosing the proper box to send your Christmas present in, you are again looking for a sound box that suits the fact that it will be sent through the post. You won’t use the same thin cardboard that you might keep spices in the cupboard in; you want something sturdy that can handle some rolling around and being moved from plane to truck.

The size of the box is important too: again, you have to match the box size to the gift itself. You won’t send “Aunt Kathy” a small box of chocolates in a box made for a television set, or a tennis racket in a shoe box.

Once the wrapping is over the box, technically, the box belongs to the wrapper which is covering it. No one sees the box because it is covered by the paper and despite the box’s presence, it’s clear this is a Christmas present.

Under PPLI, the insurance company opens the account at the custodian bank, so the bank account belongs to the insurance company; the insurance company is the beneficial owner of the bank account. No matter who the policyholder is, the bank opens an account for the benefit of the insurance company’s policy xyz, with you being the policyholder of xyz. This is what leads to the policyholder being able to invest internationally; the insurance company is a non-US entity making the investments on its bank account.

The policy’s bank account, much like the insurance company, must be well-matched to the client and the insurance company. What are the minimums, fees, are there investment types you cannot make with the bank, will they work with your insurance company and asset manager?

The “strength” of the bank is important, but even more so the jurisdiction used for the bank. Can the bank handle international trades and investments, can funds be wired easily, and is it located in a jurisdiction considered safe for the investor you are and the investments you want to make. If you are a US person, do you want to try international trading at the local credit union – in the US, for that matter – or do you want to trust a Swiss bank that has been operating for 100 years, and is located in one of the only true democracies left in the world?

The PRESENT itself, or the asset manager and investments being made

Inside of the wrapping paper and the box, you have the present itself. You want the actual gift to get to Uncle Bob or Aunt Kathy in one piece because, well, it’s a gift you want them to enjoy. It’s worth a lot and we need to make sure it’s protected.  And, the “value” of the gift to your recipient is determined by what the actual contents are and their appreciation of it. You wish you could see their faces when they open the gift.

Here, it’s critical that you know what your recipient likes: Aunt Kathy doesn’t want the Shimano Spirex fishing reel…  she wants the bottle of Chanel No. 5. And Uncle Bob loves Macallan’s 18-year old Fine Oak single malt whiskey. DO NOT send him a scarf!

Equally, for our PPLI policy, it’s important that you as the investor are in line too with how the asset manager invests those assets. It’s critical to understand your risk aversion, your goals with the investments, and what type of investment “style” you have. What will your liquidity needs be and when do you anticipate needing funds? These are all important questions that the asset manager needs to understand in implementing the investment strategy. Your goals are made clear upfront and for the duration.

The strategy can include many international assets you might not have access to in your home country. It can be Irish whisky or French perfume, but it also can be something ultra-practical, like a pair of socks. Or it can be a bit of both. The fact is that you have a lot of flexibility in the types of presents you want to make – or the investment strategy you want to wrap in.

Similar to the Christmas gifts value, the value of the policy at any given time is determined by how you are invested; as the performance of those assets goes, so does the value of your policy. And, it is possible to pass along and share your PPLI investment with your family. You can directly name your beneficiaries within a policy, even going as far in some cases to list exactly how you want distributions to be made.

The Christmas gift as a whole just keeps getting better

When you put the gift, the box, and the paper around the entire package, the Christmas gift is complete and ready to send. Each component on their own serves their own unique purposes, but together they form one formidable structure. As a whole, the PPLI package provides additional benefits visualized through the Christmas-wrapped present.

First, it’s possible to change any of components of the structure at any given time while still keeping the integrity of the policy. At any point if we need to change the insurance company, custodian, or asset manager/strategy, for whatever reasons they may be, we can make that change while still keeping the “package” together.

No part of the package can be changed without the other being affected. This offers a tremendous protection from any part of the PPLI structure acting on their own. Let’s call it a series of checks-n-balances: there’s no way to take the contents out of the package without the box and wrapping knowing about it.

And, especially for Americans filling out their information reporting (FBAR), no matter what the contents of the gift are, you are only ever reporting that it’s a Christmas present. So on your FBAR form, you report the value of the gift together, but you don’t have mention anything more than its overall value and that it is a “Christmas present”. No need to write down the Chanel No. 5 or the Macallan’s that’s inside.

Give the Christmas gift that keeps on giving

I certainly didn’t cover all angles of PPLI here, and critics going over the “Christmas Gift” analogy to PPLI with a fine-tooth comb will undoubtedly try to raise more questions. I know I may have left gaps in some logic, and I certainly didn’t cover some of the key benefits tax advantages, liquidity, investment options, etc.

But that wasn’t my goal today. My goal was to compare the structure of PPLI with something that hopefully helps you understand the structure and concept of PPLI more. Let’s call it our gift to you. After all, everyone I know likes to receive a Christmas gift, and everyone I know likes to protect and grow their wealth.

Now that I’ve passed that Christmas gift on to you, all of us here at the Mountain Vision want to take this opportunity to sincerely wish all of our readers – all of you – a Merry Christmas and a Happy, Healthy and Prosperous New Year!

Scott “The Christmas gift-wrapper” Schamber

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