A Private Placement Variable Annuity (PPVA) is the use of an annuity structure by an accredited investor and/or qualified purchaser to apply the tax benefits of an annuity to one or more single investments or to a customized portfolio.1 A PPVA recharacterizes a highly tax-inefficient investment as an annuity so that the investments underlying the policy can grow tax-deferred until the investments are accessed as annuity income in the future.
PPVAs share many of the same attributes and are covered by much of the same legislation and regulations as private placement life insurance (PPLI) but differs in structure and some applications. As an annuity, PPVA does not contain a life insurance death benefit component, and this means there is no medical underwriting and there are no premium limitations resulting from how much death benefit risk the insurance company can provide for each policy. Therefore, a PPVA contract holder can make unlimited contributions.
A PPVA differs from a traditional annuity in much the same way a PPLI policy differs from traditional life insurance. The insurer is responsible for arranging the annuity structure, leaving the choice of investment manager and custodian to the contract holder. The investment manager then instructs the insurance company on what underlying investments to make for the annuity. As with PPLI, the investments in a form of an Insurance Dedicated (Fund) or a Separately Managed Account (SMA) underlying a PPVA are held separate from the general account of the insurer and not subject to the insurer’s creditors.2
Unlike a traditional annuity, a PPVA does not have features such as income guarantees or principal protection. As a result, PPVAs generally have substantially lower fees.
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[1] Private placement products offered by U.S. carriers to U.S. persons are subject to SEC regulations. Each purchaser generally must be a ”qualified purchaser” under §2(a)(51) of the Investment Company Act of 1940, 15 USC §80a-2(a)(51), and/or an “accredited investor” under §501(a) of Regulation D of the 1933 Act, 17 CFR §230.501(a). A “qualified purchaser” is an individual or a family-owned business that owns $5 million or more in investments. An “accredited investor” is anyone who meets one of the below criteria: Individuals who have an income greater than $200,000 in each of the past two years or whose joint income with a spouse is greater than $300,000 for those years, and a reasonable expectation of the same income level in the current year.
[2] IRC §817(c). A “separate account” is a separate set of financial statements held by a life insurance company, maintained to report assets and liabilities for particular products that are separated from the insurer's general account. Detailed statutory financial statement data and disclosures regarding the products and assets captured in a separate account can be found in SSAP No. 56—Separate Accounts.
