Private placement insurance products occupy a unique place in the spectrum of financial products. While having the same tax benefits, private placement insurance products offer policy structures and investment alternatives not found in traditional retail variable universal life (VUL) and variable annuity (VA) products. Because they can only be offered to individuals who are qualified purchasers and accredited investors, private placement variable universal life (PPVUL) and variable annuities (PPVA) offer high net worth clients access to both investment alternatives and customized product designs that are difficult or impossible to obtain in traditional retail or registered products. They are optimal in their use as a tool to address a multitude of financial, income, and estate tax planning objectives.
Because of its preferential treatment from an income tax perspective, insurance must be properly structured in order to assure it maintains its tax benefits. Clients should work with brokers experienced in structuring policies for high net worth clients and in working with multiple insurers to obtain the most favorable underwriting outcome.
By law, all securities (which include variable insurance products) must be registered with the Securities and Exchange Commission (SEC). However, registration exemptions exist for securities (private placements) offered only to specific qualified purchasers (see Accredited Investor and Qualified Purchaser section).
In the case of investment funds, SEC registration stipulates that shares have sufficient liquidity so that they may be redeemed by shareholders at the current net asset value. This requires investment funds to be valued on a daily basis in order to fulfill redemption requests. Investment funds that do not seek to be registered (exempt funds) with the SEC often do so because they are difficult to value on a daily basis as a result of the types of assets they hold, such as options, derivative contracts, or other investment funds. In addition, exempt funds often engage in investment strategies that are illiquid and therefore require shareholders to remain invested for a certain period of time before they can redeem their shares.