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Senate Finance Committee Chairman Ron Wyden.

Life Health > Life Insurance > Permanent Life Insurance

Senate Finance Chair Asks Blackstone Unit for Private Placement Life Details

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What You Need to Know

  • Lombard International offers high-net worth clients the ability to put investments of their choosing inside life insurance policies.
  • Wyden wrote that the products are available only to the wealthiest 1% of Americans.
  • Lombard says it and member companies comply fully with all applicable legal, regulatory and fiscal requirements.

Congress may be about to pay more attention to private placement life insurance — arrangements wealthy individuals and families can use to package investments of their own choosing inside variable universal life insurance policies.

Sen. Ron Wyden, D-Ore., the chair of the Senate Finance Committee, today announced that he is investigating the use of PPLI policies by wealthy Americans to avoid and evade taxes.

Wyden started the investigation by sending a letter to Lombard International, a Blackstone unit that’s a well-known player in the PPLI market, to ask the company about the PPLI arrangements it has set up.

“I am concerned that these insurance vehicles are being used without a genuine insurance purpose to invest in hedge funds and other investments while avoiding billions of dollars in federal taxes,” he wrote.

Lombard said in a statement that it follows the rules.

“Lombard International Group and its member companies fully comply with all applicable legal, regulatory and fiscal requirements in the jurisdictions where they conduct business,” the company said.

What It Means

Advisors who have helped clients with PPLI arrangements in the past need to ask their compliance advisors for help understanding what’s happening with federal oversight in that area.

Advisors who are developing new PPLI-based structures might need help with preparing for the possibility that IRS rules, or interpretations of rules, could change.

Private Placement Life Insurance

U.S. taxpayers have been using PPLI arrangements to customize their life insurance for decades.

The typical U.S. users tend to invest $4 million or more, because they must qualify as wealthy, “accredited investors” under SEC rules, according to a PPLI slidedeck prepared by lawyers at Giordani Baker Grossman & Ripp.

Customers can use hedge funds, private equity funds and alternative investments in the asset mix, and the cost may be less than 1.25% of the invested amount per year, on average, within about 15 years, the Giordani Baker lawyers estimate.

The U.S. Government Accountability Office reported in August 2020 that it believed that there are many legitimate uses for offshore life insurance, but that an Internal Revenue Service official believed that some policies had been used to conceal assets from the IRS.

In May, a Swiss insurer, Swiss Life Holding, agreed to pay about $77 million to resolve a U.S. PPLI criminal case. Prosecutors accused the company of using life insurance 1,608 wrapper policies to hide $1.45 billion in assets from the IRS.

The Letter

Wyden has not suggested in the new letter, which is addressed to Stuart Parkinson, Lombard’s CEO, that he has reason to believe that Lombard has broken any law or regulation.

He told Lombard that he wants to “better understand how Lombard may be assisting millionaires and billionaires minimize or eliminate taxes on investment.”

He noted that, given the large size of the typical PPLI arrangement, “by definition, these policies are only available to the wealthiest 1% of Americans and offer a myriad of tax advantages not available to most working Americans.”

He observed that Lombard has about $67 billion in assets under administration, but he acknowledged that he is not sure what percentage of those assets is related to PPLI arrangements or how big the overall PPLI market is.

He asked Parkinson to answer his questions by Aug. 31.

The Questions

Here are the questions in the letter:

1. Please provide the current dollar value of assets under administration by Lombard International with respect to PPLI products held by Lombard clients. Please explain how Lombard International calculates the dollar value of assets under administration with respect to PPLI products. If applicable, please also provide a breakout between assets under administration because a client purchases a PPLI product issued by Lombard or its affiliates as compared to assets under administration because a client is advised to purchase (and does purchase) a PPLI product issued by a third party insurance company.

2. Please provide the dollar value of new assets under administration with respect to PPLI products held by Lombard clients in each year starting with 2015 through 2021 and as of the date of your response to this letter in 2022.

3. Please provide a list of all pooled investment funds in which PPLI products of Lombard clients are invested, and the current fair market value for each such fund to the extent of aggregate Lombard client PPLI product ownership. Please provide a copy of all Form D filings filed by Lombard International or its affiliates with the U.S. Securities and Exchange Commission related to insurance dedicated funds offered to Lombard clients.

4. Is investment in PPLI products marketed to new or existing clients, including clients of parent company Blackstone, as a means to minimize or eliminate ordinary income, capital gains or estate taxes? If so, please explain the legal basis for why these products help minimize or eliminate taxes.

5. What minimum criteria (net worth, income, etc.) is required of your PPLI product clients? What is the average net worth of your PPLI product clients? What is the average income of your PPLI product clients?

6. How are possible clients for PPLI products identified? Does your parent company, Blackstone, refer possible clients? If so, what are the referral criteria that must be met?

7. Please describe the Know Your Customer (KYC), Customer Due Diligence (CDD) or other anti-money laundering processes you have in place with respect to PPLI product clients.

8. Has Lombard ever marketed or told clients that PPLI products could be used as “insurance wrappers” to conceal ownership of offshore assets? If so, were clients advised of the need to declare ownership of accounts linked to these products to the appropriate regulators?

9. Please describe the typical policy acquisition and annual maintenance costs that apply to PPLI products. What other costs or fees are paid (directly or indirectly) by your PPLI product clients? How is your sales team compensated with respect to PPLI product clients (please describe in detail)?

10. For a PPLI product issued by Lombard or an affiliate, please describe the process by which a pooled investment fund is selected for the product, and the degree to which a client or his or her advisor controls this decision.

11. What percentage of Lombard PPLI product clients are non-U.S. persons, beneficial owners, or beneficiaries? Of this population, what is their average net worth based upon information provided by clients? What is their average income? Is there targeted marketing for potential non-U.S. clients?

12. Please provide copies of all sales and marketing materials (to include client and Lombard agent versions) related to your PPLI product offerings.

Pictured; Sen. Ron Wyden, D-Ore. (Photo: Bloomberg)


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