Anatoly Iofe is founder and CEO of IceBridge Financial Group, a global multifamily office based in Boca Raton, Florida.
If you’re looking for a way to supercharge your wealth while keeping Uncle Sam at bay, let’s chat about separately managed accounts (SMAs) inside private placement life insurance (PPLI). This combo is like the dynamic duo of financial planning—customizable, tax-efficient and packed with potential.
PPLI is a sophisticated financial tool to combine wealth preservation, tax efficiency and investment flexibility. PPLI offers a unique structure where the cash value of the policy is invested in a customized portfolio tailored to the policyholder’s financial goals. It’s a potential powerhouse for wealth preservation, growth and estate planning.
The flexibility of PPLI stems from its private placement nature, meaning it is not subject to the same regulatory constraints as publicly offered insurance products. Policyholders can work with investment managers to allocate funds across a range of asset classes, such as equities, fixed income, commodities or even bespoke strategies like venture capital or distressed debt.
Additionally, the tax-deferred growth of the cash value and the ability to access funds through policy loans provide a compelling advantage, enhancing the appeal of PPLI as both an estate planning tool and an investment vehicle.
The SMA Magic: How It Works Inside PPLI
An SMA is like having your own personal investment chef—they cook up a portfolio just for you, tailored to your tastes, and you own every ingredient directly. Inside a PPLI policy, an SMA is a custom-managed portfolio run by a professional investment manager. They’ve got the reins to buy, sell and tweak the holdings based on your goals, all while keeping everything compliant with insurance regs (like the IRS’s diversification rules under Section 817(h)).
You fund your PPLI policy with a premium, which could be cash or existing securities. That money flows into a segregated account, separate from the insurance company’s general pool, where your SMA lives.
Your investment manager then crafts a portfolio that’s uniquely yours, picking investments that match your risk appetite, financial dreams and ideally even your values.
All the growth inside that SMA—capital gains and dividends—happens tax-deferred. No 1099s or K-1s, no tax returns and no tax bill if you get your money via policy loans.
Flexibility And Adaptability: Your Portfolio, Your Rules
One of the coolest things about SMAs in PPLI is how flexible they are. Life changes, markets shift and your goals evolve—so why should your investments stay stuck?
With an SMA, your manager can pivot on a dime. Want to dial down risk as you near retirement? Done. Spot a hot new sector you want in on? They can make it happen. Unlike rigid investment vehicles, SMAs adapt to you, not the other way around.
Plus, you’ve got control—within limits (more on this below). The IRS’s Investor Control Doctrine means you can’t micromanage every trade (that’s your manager’s job). But you can set the vibe—say, “I want growth with a side of income,” or “Keep it green and sustainable.”
Investment Options Galore
So, what can you toss into an SMA inside PPLI? Pretty much anything that fits the diversification rules and your manager’s playbook: stocks, bonds, alternative assets, ETFs and index funds, commodities and insurance-dedicated funds (IDFs).
SMAs Vs. IDFs: What’s The Difference?
How do IDFs stack up to SMAs? IDFs and SMAs are the two main flavors of investment options inside PPLI, and they’re like apples and oranges—both tasty, but they hit different spots.
IDFs: These are pooled funds, built specifically for insurance policies. They’re managed by pros with a set strategy—like a private credit fund or a hedge fund—and you pick from the insurance company’s “menu.” IDFs are awesome if you want a prepackaged, diversified option but with less customization. You’re locked into the fund’s strategy, and if it doesn’t vibe with your goals, you’re out of luck.
SMAs: With an SMA, you’re not picking from a menu—you’re writing the recipe. You own the securities directly, and your manager tailors everything to your needs. Want to mirror a winning strategy you’ve got outside PPLI? Need to exclude certain sectors or chase a niche opportunity? SMAs got you.
In short, IDFs are plug-and-play, great for simplicity and lower entry points. SMAs are custom-built—perfect if you’ve got the cash and crave control.
Why It Can Be A Win-Win
So, why pair SMAs with PPLI? It’s all about the benefits:
Tax Efficiency: There are no taxes on gains while they compound inside the policy.
Customization: Your portfolio reflects you—your goals, your values, your vision.
Transparency: You see every move, every holding, crystal clear.
Growth Potential: You have access to alternative investments that might be too tax-inefficient outside PPLI.
Legacy Power: The death benefit passes to your heirs income-tax-free, wrapping up your wealth plan with a bow.
Perhaps you’re a real estate mogul who wants less property exposure in your portfolio. Your SMA manager crafts a mix heavy on tech stocks and private equity, all growing tax-deferred inside PPLI. Or maybe you’re a tech exec with a big stock position; your SMA balances it out with bonds and alternatives. That’s the beauty of SMAs in PPLI—it’s your money, your way.
Considerations And Caveats
That said, it’s not for everyone. The biggest obstacle in PPLI is higher minimums; in my experience, for SMAs, it’s usually $20 million. You can still invest via PPLI with much lower minimums, but this will not be SMA. The layered fees of the insurance wrapper, legal structuring and SMA management can add up.
In addition, it requires a bit of setup. Ensuring the structure complies with IRS guidelines and life insurance diversification rules requires ongoing legal and tax oversight. Without careful planning and management, the intended tax benefits can be compromised.
As mentioned earlier, investor control is also limited. To preserve the tax-deferred status of the PPLI, the policyholder must not have direct control over investment decisions. This limitation can feel restrictive, particularly for HNW individuals used to customizing their portfolios through SMAs. Additionally, the SMA strategies must be approved and managed by a registered investment advisor affiliated with the insurance carrier, which can limit manager selection or strategy flexibility.
Finally, PPLI structures are generally illiquid and long-term vehicles, making them unsuitable for investors who may need access to their capital in the short or medium term.
Ready To Roll?
If you’re sitting on some serious wealth and want to keep more of it out of the IRS’s domain, SMAs inside PPLI could be your golden ticket. Again, it’s not for everyone—it’s best for the high-net-worth crowd—but if you fit the bill, it’s worth a conversation with your advisor. Think of it as a VIP pass to tax-smart investing with a custom twist.
The information provided here is not investment, tax, legal or financial advice. Consult with a licensed legal or tax professional for advice concerning your specific situation. www.ifg.one/disclaimers
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