Private Placement Variable Annuity

An annuity is a contract with an insurance company that accumulates value on a tax deferred basis and allows the annuitant to annuitize the contract value for a guaranteed stream of income. During the accumulation phase, the contract’s value can grow without recognition of income for tax purposes [IRC Sec. 72]. While annuities are required to begin paying income (“annuitize”) by a certain point (usually age 90 or 100), they also allow policyowners to access account values either in partial installments or lump-sum withdrawals. Withdrawals are taxed as ordinary income to the extent that the policy’s value exceeds basis, or the premium paid into the policy. In addition, a 10% penalty can be levied on the taxable amount if the withdrawal occurs before the annuitant’s age 59½.

Registered VAs are generally designed for buyers interested in accumulating assets by investing in investment accounts for the purpose of receiving a guaranteed stream of income in the future. In addition, many registered VAs also provide a minimum floor return on the investment values while the contract builds value or guarantees a return of principal. This makes registered VAs relatively expensive due to the benefits provided to buyers interested in guaranteed income.

Unlike registered VAs, PPVAs are designed primarily for buyers who are interested in accumulating assets without recognizing income for tax purposes. Due to the qualification threshold for private placement investments, PPVA holders generally are not looking for the guaranteed return benefits found in registered VAs. As a result, PPVAs are usually much less expensive than registered VAs. In addition, because growth in the value of an annuity is tax-deferred, PPVAs are especially attractive vehicles for investors who are interested in accumulating assets in investment funds that are tax-inefficient, or annually generate a high degree of ordinary income in their investment returns.

PPVAs are structured with no upfront charges on premium investments and no back-end charges on withdrawal or surrender. Policy assets are held in separate accounts that are not accessible by creditors of the insurance company. Policy account values can be reallocated between available investment choices without penalties or tax consequences. In addition, policyowners invested in exempt investment funds do not receive K-1 statements.

PPVAs must be owned by natural persons or a trust for the benefit of natural persons. In some states (e.g., Florida, Texas), annuity assets owned by natural persons are protected from creditors. Additionally, a tax-exempt charity can be designated as the beneficiary of the contract, allowing the policyowner to retain control of the assets during his or her lifetime without causing the policy assets to be subject to income or estate taxes.

A properly structured PPVA will not be taxed on the growth of its value until it is surrendered (redeemed) or has had withdrawals taken from it. Buyers may retain full ownership and control of their assets while enabling potential tax-free distributions at death to private foundations and/or charities. Again, policyowners invested in exempt investment funds do not receive K-1 statements.


Private Placement Disclosure:
Private Placement Life Insurance is an unregistered securities product and is not subject to the same regulatory requirements as registered variable products. As such, Private Placement Life Insurance should only be presented to accredited investors or qualified purchasers as described by the Securities Act of 1933. Any offer of sale must be proceeded or accompanied by the current offering memorandums for the separate account and completion of the investor qualification questionnaire.
Private Placement Variable life insurance products are long-term investments and may not be suitable for all investors. An investment in Private Placement Variable life is subject to fluctuating values of the underlying investment options and it entails risk, including the possible loss of principal.
Investors should consider the investment objectives, risks, charges and expenses of any Private Placement Variable life insurance policy carefully before investing. This and other important information about any Private Placement Life Insurance is contained in the offering memorandum.
This information has been taken from sources, which we believe to be reliable, but there is no guarantee as to its accuracy. This material is not intended to present an opinion on legal or tax matters. Please consult with your attorney or tax advisor.