Life insurance can be a powerful solution for some of the needs and wants of wealthy families. It can be used to address inheritance taxes, provide cash in the future and address several business concerns.
Life insurance has many permutations. When it comes to using life insurance by the wealthy, one way to think about the different types of life insurance is between traditional and private placement life insurance. There are many versions of traditional life insurance but they have some distinct similarities. Meanwhile, private placement life insurance is meaningfully different in several ways from traditional policies.
Comparing Traditional Life Insurance And Private Placement Life Insurance
The cost of traditional life insurance policies is set by governmental entities. The life insurance professionals are unable to change the commission structure. Likewise, insurance companies cannot change the commission structure on a case-by-case basis. The commissions are primarily front-loaded which means they are paid in the first year. In contrast, private placement life insurance is usually fee-based.
While the cost of traditional life insurance is non-negotiable, some of the fees in private placement life insurance are negotiable. Certainly, the basis point fees and project fees charged by the advisors can be adjusted.
The guaranteed death benefit is core to some traditional insurance policies. The policy owner knows precisely what the beneficiaries will receive when the policy pays out. With private placement life insurance, the death benefit is commonly minimized and can vary based on the performance of the selected investment advisor.
“With traditional life insurance, the policy owner is limited to the investment options provided by the insurance company based on the type of policy. On the other hand, with private placement life insurance, the policy owner chooses the investment advisor to manage the assets in the policy. This feature is regularly very attractive to wealthy families,” says Cliff Oberlin, Chairman and CEO of Oberlin Wealth Partners and co-author of Family Fortunes: How Family Enterprises Thrive Across Generations.
“For a wealthy family the decision whether to use traditional life insurance policies or private placement life insurance policies is dependent on the family’s objectives,” says Frank Seneco, president of the advanced life insurance planning boutique, Seneco Global Advisors. “For example, if the family needs to make sure there are monies to pay estate taxes, then traditional life insurance is usually the best way to go. If the family is looking to substantially grow their wealth, then private placement life insurance makes more sense. To decide on what life insurance is most appropriate and how best to structure it requires an in-depth understanding of the outcomes the family desires for as well as the wealth planning the family is doing.”
Russ Alan Prince is the executive director of Private Wealth magazine and one of the leading authorities in the private wealth industry. He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals. Connect with him on LinkedIn.com.