IN THE KNOW MARCH 2012

Auent investors and their advisors are constantly

looking for tax advantaged ways to increase their
wealth. e 35% tax that often accompanies hedge
fund investments is a cause of great frustration, but
can be mitigated by investing within a private place-
ment life insurance policy. Investing inside of a life
insurance wrapper provides both tax free accumu-
lation, as well as income and estate tax free death
benet. ese specialized life insurance products
allow policyholders to choose from a wide array of
investment alternatives ranging from hedge funds
to real estate.
e investor must be an accredited investor and
qualied purchaser as dened by the Securities and
Exchange Commission. ey also must be able to
qualify for life insurance, and there will be a mortal-
ity cost paid to a third party insurer or reinsurance
company. Many private placement companies will
require at least a $1,000,000 initial premium.
Additionally, many policyholders seek the creditor
protection oered by the private placement insurance
product. Many state statutes oer varying degrees of
protection from the claims of creditors. Some clients
in litigious industries may opt to place their contract
oshore, further protecting cash values from claims
of creditors.
Consider this scenario:
Mr. Jordan is a 45 year old with an extensive market
experience and unquestionable athletic prowess. He
is comfortable with the risks associated with hedge
fund investing, but also burdened by being in the
maximum income tax bracket. e client and his
advisor decide to structure a private placement life
insurance policy and place $10,000,000 over a four
year period inside the contract. At an 8% annualized
return his ledger would look something like this:
Private PIacement Insurance
Shielding Actively Managed Accounts from Taxation
Year
Total
Allocation
PPVUL Death Benefit @
8%, and Current
Insurance Charges
PPVUL Cash Surrender
Value @ 8%, and Current
Insurance Charges
Taxable Portfolio
Surrender Value @
8% Difference
1 2,500,000 0 0 0 , 0 9 5 , 4 5 $ 3 5 5 , 5 8 5 , 2 $ 0 0 0 , 0 2 6 , 2 $ ) 7 4 4 , 4 3 ( $ $
2 2,500,000 0 0 0 , 0 9 5 , 4 5 $ 9 6 4 , 7 4 3 , 5 $ 0 2 7 , 6 6 3 , 5 $ ) 1 5 2 , 9 1 ( $ $
3 2,500,000 0 0 0 , 0 9 5 , 4 5 $ 7 2 4 , 7 9 2 , 8 $ 6 3 5 , 6 4 2 , 8 $ 1 9 8 , 0 5 $ $
4 2,500,000 0 0 0 , 0 9 5 , 4 5 $ 4 5 7 , 5 6 4 , 1 1 $ 2 6 9 , 5 6 2 , 1 1 $ 2 9 7 , 9 9 1 $ $
5 - $ 54,590,000 7 8 0 , 5 3 2 , 2 1 $ 2 8 7 , 1 1 8 , 1 1 $ 5 0 3 , 3 2 4 $ $
10 - $ 54,590,000 4 8 4 , 6 2 9 , 6 1 $ 9 9 5 , 6 6 9 , 4 1 $ 5 8 8 , 9 5 9 , 1 $ $
15 - $ 31,929,933 8 0 3 , 8 2 8 , 3 2 $ 7 5 2 , 4 6 9 , 8 1 $ 1 5 0 , 4 6 8 , 4 $ $
20 - $ 41,074,345 6 9 4 , 7 6 6 , 3 3 $ 1 1 7 , 9 2 0 , 4 2 $ 5 8 7 , 7 3 6 , 9 $ $
30 - $ 72,288,313 1 7 1 , 9 5 5 , 7 6 $ 4 4 0 , 1 8 5 , 8 3 $ 7 2 1 , 8 7 9 , 8 2 $ $
40 - $ 142,959,966 9 4 3 , 2 5 1 , 6 3 1 $ 4 2 0 , 4 4 9 , 1 6 $ 5 2 3 , 8 0 2 , 4 7 $ $
Numbers above are taken from the highlighted section of taxable vs non-taxable cost benefit analysis.
Incremental cost breakeven occurs in year 2; all charges associated with the PPVUL structure in given year are less than the taxes owed in the taxable account.
Incremental surrender value breakeven occurs in year 1; cash value with the PPVUL structure is greater than the cash value of the taxable account.
Taxable portfolio assumes 75% turnover per year, taxes paid each year at an effective rate of 40%.
Summary of Values PPVUL Non-MEC Structure VS. Taxable Account
PPVUL surrender value, in non-MEC structure, can be accessed through loans and partial withdrawals. Subject to the recapture ceiling, withdrawals
are treated as basis first and gain second. Loans have no immediate tax effect as long as the policy is kept in force and in a non-MEC status.
$-
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
$120,000,000
$140,000,000
$160,000,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
PPVUL Cash Surrender Value @ 8%, and Current Insurance Charges Taxable Porolio Surrender Value @ 8%
For Discussion Purposes Only
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Year
Total
Allocation
PPVUL Death Benefit @
8%, and Current
Insurance Charges
PPVUL Cash Surrender
Value @ 8%, and Current
Insurance Charges
Taxable Portfolio
Surrender Value @
8% Difference
1 2,500,000 0 0 0 , 0 9 5 , 4 5 $ 3 5 5 , 5 8 5 , 2 $ 0 0 0 , 0 2 6 , 2 $ ) 7 4 4 , 4 3 ( $ $
2 2,500,000 0 0 0 , 0 9 5 , 4 5 $ 9 6 4 , 7 4 3 , 5 $ 0 2 7 , 6 6 3 , 5 $ ) 1 5 2 , 9 1 ( $ $
3 2,500,000 0 0 0 , 0 9 5 , 4 5 $ 7 2 4 , 7 9 2 , 8 $ 6 3 5 , 6 4 2 , 8 $ 1 9 8 , 0 5 $ $
4 2,500,000 0 0 0 , 0 9 5 , 4 5 $ 4 5 7 , 5 6 4 , 1 1 $ 2 6 9 , 5 6 2 , 1 1 $ 2 9 7 , 9 9 1 $ $
5 - $ 54,590,000 7 8 0 , 5 3 2 , 2 1 $ 2 8 7 , 1 1 8 , 1 1 $ 5 0 3 , 3 2 4 $ $
10 - $ 54,590,000 4 8 4 , 6 2 9 , 6 1 $ 9 9 5 , 6 6 9 , 4 1 $ 5 8 8 , 9 5 9 , 1 $ $
15 - $ 31,929,933 8 0 3 , 8 2 8 , 3 2 $ 7 5 2 , 4 6 9 , 8 1 $ 1 5 0 , 4 6 8 , 4 $ $
20 - $ 41,074,345 6 9 4 , 7 6 6 , 3 3 $ 1 1 7 , 9 2 0 , 4 2 $ 5 8 7 , 7 3 6 , 9 $ $
30 - $ 72,288,313 1 7 1 , 9 5 5 , 7 6 $ 4 4 0 , 1 8 5 , 8 3 $ 7 2 1 , 8 7 9 , 8 2 $ $
40 - $ 142,959,966 9 4 3 , 2 5 1 , 6 3 1 $ 4 2 0 , 4 4 9 , 1 6 $ 5 2 3 , 8 0 2 , 4 7 $ $
Numbers above are taken from the highlighted section of taxable vs non-taxable cost benefit analysis.
Incremental cost breakeven occurs in year 2; all charges associated with the PPVUL structure in given year are less than the taxes owed in the taxable account.
Incremental surrender value breakeven occurs in year 1; cash value with the PPVUL structure is greater than the cash value of the taxable account.
Taxable portfolio assumes 75% turnover per year, taxes paid each year at an effective rate of 40%.
Summary of Values PPVUL Non-MEC Structure VS. Taxable Account
PPVUL surrender value, in non-MEC structure, can be accessed through loans and partial withdrawals. Subject to the recapture ceiling, withdrawals
are treated as basis first and gain second. Loans have no immediate tax effect as long as the policy is kept in force and in a non-MEC status.
$-
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
$120,000,000
$140,000,000
$160,000,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
PPVUL Cash Surrender Value @ 8%, and Current Insurance Charges Taxable Porolio Surrender Value @ 8%
For Discussion Purposes Only