Private Placement Life Insurance Overview Presentation The Leaders - PowerPoint PPT Presentation

Private Placement Life Insurance Overview Presentation The Leaders Group, Inc. 26 W. Dry Creek Circle Suite 575 Littleton, CO 80120 FOR BROKER USE ONLY

What is Private Placement? • Not registered with the SEC • Not allowed to be associated with general solicitation • Allowed to be discussed with or sold to accredited investors or qualified purchasers only • Private offerings to investors with terms allowed to be unique to the specific offering Recent changes in federal estate tax law has caused income tax planning to become high priority for ultra-high net worth clients. Additionally, an increase in tax rates for investment income is driving demand for more tax-efficient investment vehicles FOR BROKER USE ONLY

Clients Need Tax Efficiencies A high-net worth California resident is invested in a hedge fund of funds (75% short term capital gains/ ordinary income; 25% long-term capital gains) Return after fund m anagem ent fees 7.0 0 % Federal tax rate 39.7% [(44.6% x .75) + (25.0% x .25)]: -2.78% State and local tax at 13.3% combined: -0.93% Deduction for state and local tax: 0.37% Net after-tax return: 3.66% FOR BROKER USE ONLY

What is Private Placement Life? • PPLI is a low-cost variable life insurance wrapper with costs managed to be significantly below income tax drag of an equivalent taxable account (Cost of Tax > Cost of Insurance) • The primary advantage of PPLI is the ability to design a life insurance policy to look more like an investment and less like a traditional life insurance policy (Overfunded, minimum-non MEC structure, with low levels of COI) • PPLI includes exempt investment subaccount options in addition to registered investment subaccounts. PPLI is not registered with the SEC. These subaccounts usually include hedge fund strategies FOR BROKER USE ONLY

Private Placement Investment Options • Registered variable life products can only invest in registered subaccounts • Must have daily valuation • Must offer daily liquidity • Private placement products can be invested in subaccounts that are unregistered • Can be valued on a monthly or quarterly basis • Can have restricted liquidity and investment terms / conditions • Investment options can be customized to the client’s preferences • Hedge fund or investment managers will be required to set up insurance dedicated funds (IDFs) through a third party such as SALI Fund Services or independently and will need to be approved by the PPLI carrier FOR BROKER USE ONLY

Private Placement Qualifications Client must be pre-qualified before any information is discussed regarding Private Placement products: • Policyowner must be a Qua lified Purcha ser (QP) to own PPLI • Individuals with $5 million of qualified investments • Family-owned company with $5 million of qualified investments • A corporation, partnership, limited liability company, trust, or tax-exempt organization where each beneficial owner is a Qualified Purchaser • A corporation, partnership, or trust with at least $25 million in qualified investments • Policyowner must also be an Accred ited Inv estor (AI) to own PPLI • Individuals: Net worth greater than $1 million, OR reported annual income of $200,000 ($300,000 if joint) for the last two years • Institutional Investors, such as corporations, financial institutions, employee benefit organizations or trusts with assets in excess of $5 million FOR BROKER USE ONLY

What are Qualified Assets? • Cash and cash equivalents • Securities as defined in section 2(a)(1) of the 1933 Act (no control issues) • Real estate held for investment purposes • Commodity interests held for investment purposes • Physical commodities held for investment purposes • Financial contracts entered into for investment purposes • Cash value of life insurance FOR BROKER USE ONLY

PPLI Structure and Design Private placement life insurance is designed for investment accumulation while minimizing the cost drag on the underlying portfolio performance Resulting in: Minimum Non-MEC Traditional LI Policy Design Reducing Cost of Insurance Charges Maximizing Cash Value, Minimizing COI Maximizing Death Benefit (COI) Minimizing death benefit coverage Maximum Maximum while still qualifying Death Premium for life insurance Benefit Minimum Minimum Payment under the IRS Death Premium Benefit Payment Maximizing cash value and investment pool of assets FOR BROKER USE ONLY. Life insurance policies contain fees and expenses, including cost of insurance, administrative fees, premium loads, surrender charges, and other charges or fees that will impact policy values. Variable universal life insurance policies also have additional charges and fund operating expenses. Guarantees are based on the claims-paying ability of the issuing company. Distributions from MECs (such as loans, withdrawals, and collateral assignments) are taxed less favorably than distributions from policies that are not MECs to the extent there is gain in the policy. For distributions from a MEC prior to age 59½, a federal income tax penalty may apply to the extent there is gain in the policy. However, death benefits are still generally received income tax-free pursuant to IRC §101(a). The death benefit will be reduced by any withdrawals or loans (plus unpaid interest). Clients should consult a tax advisor.

PPLI Structure and Design (Cont.) The Overfunded Design : More: Cash Value Access Via: Policy Loans Less: Death Benefit Withdrawals Cash Value Death Benefit Total Premiums FOR BROKER USE ONLY. The graphic shown is hypothetical for illustrative and educational purposes only to describe the impact of possible premium and death benefit designs on cash value potential. It does not represent the cost or performance of any specific life insurance product. Distributions from MECs (such as loans, withdrawals, and collateral assignments) are taxed less favorably than distributions from policies that are not MECs to the extent there is gain in the policy. For distributions from a MEC prior to age 59½, a federal income tax penalty may apply to the extent there is gain in the policy. However, death benefits are still generally received income tax-free pursuant to IRC §101(a). The death benefit will be reduced by any withdrawals or loans (plus unpaid interest). Clients should consult a tax advisor.

Private Placement LI Taxation PPLI enjoys the same tax treatment as traditional life insurance • Tax deferred growth – Accumulation investment income credited under a life insurance contract is not subject to current taxation [I.R.C. §7702(g)(1)(A)] • Incom e tax-free distributions from Non-MECs – Withdrawals up to the policy owner’s basis are income tax-free [I.R.C. §72(e)(3)] and policy loans provide income tax-free access to accumulated investment income [I.R.C. §72(e)(5)] • Incom e tax-free death benefit proceeds – Death benefits received from a life insurance contract, including any accumulated investment income, are generally received income tax free [I.R.C. §101(a)(1)] • Estate tax-free proceeds – If properly structured, the proceeds of a life insurance policy paid to an irrevocable trust may be excluded from the taxable estate of the insured • Tax-free reallocations – Policy account values may be transferred among the investment options available within the policy without creating taxable events FOR BROKER USE ONLY

Prospective Client Profile • Not someone with traditional life insurance needs, e.g., income replacement, estate tax liquidity, conservative risk tolerance profile • Large percentage of wealth is invested in assets as opposed to illiquid assets or closely-held business interests • A portion of investment portfolio invested in tax-inefficient asset classes – Hedge funds, private equity, REITs, alternatives, etc. • Desire to expand investment of tax-inefficient asset classes within a tax-free insurance wrapper • Primary goal is investment accumulation and increasing tax efficiency, secondarily is estate planning, wealth transfer, legacy/ charitable planning, and protection from claims by future creditors • Seeks to maximize growth of assets for transfer to next generation and trustees seeking to optimize tax efficiencies of trust assets FOR BROKER USE ONLY

Private Placement Insurance Carriers FOR BROKER USE ONLY

Next Steps • Contact a member of the Leaders Group Marketing Team to obtain the contact information and support material for the PPLI carrier of choice 303-797-9080 x 164 marketing@leadersgroup.net • Team up with the PPLI carrier representative to gain a better understanding of the private placement marketplace and their particular product parameters • Together approach the top financial advisors or prospective clients in your marketplace with the PPLI story FOR BROKER USE ONLY