Episode Details

One of the most important—but least understood—factors affecting

Private Placement Life Insurance (PPLI) performance is:

👉 COI — Cost of Insurance charges

These charges can materially affect long-term policy returns, especially over time.

⚖️ 1️⃣ What Is COI?

COI stands for:

👉 Cost of Insurance

It represents the recurring insurance expense charged by the carrier for:

• Mortality risk

• Policy administration

• Insurance coverage obligations

💸 2️⃣ How COI Affects Policy Performance

COI charges are deducted from:

• The policy’s cash value

This means:

👉 Less money remains invested inside the policy.

📉 3️⃣ Direct Impact on Returns

Because COI functions as an ongoing expense:

• It reduces:

• Net investment growth
• Compounding efficiency
• Long-term Internal Rate of Return (IRR)

Even if the underlying investments perform well:

👉 Higher COI charges can materially reduce overall policy performance.

📊 4️⃣ Why COI Becomes More Important Over Time

A critical feature of many policies:

👉 COI charges generally increase with age.

As the insured gets older:

• Mortality risk rises

• Insurance expenses increase

Result:

⚠️ The drag on returns tends to grow over time.

🧠 5️⃣ Long-Term IRR Compression

This creates a common pattern:

Early Years

✅ Lower COI impact

✅ Stronger net compounding

Later Years

⚠️ Rising COI charges

⚠️ Reduced net cash value growth

⚠️ Declining long-term IRR

🌍 6️⃣ Why This Matters in PPLI

PPLI is often used for:

• Long-term wealth accumulation

• Multi-generational planning

• Alternative investment exposure

Because these policies may last decades:

👉 Small COI differences can produce very large long-term effects.

⚠️ 7️⃣ The Hidden Risk

If investment performance slows while COI rises:

• Policy cash values may erode faster than expected.

This can increase:

⚠️ Funding pressure

⚠️ Liquidity needs

⚠️ Risk of policy lapse

Under the

Internal Revenue Code, a lapse with gains may create:

❌ Ordinary income taxation

📄 8️⃣ Why Carrier Selection Matters

Different carriers may structure COI differently.

Due diligence should review:

• COI schedules

• Guaranteed vs non-guaranteed charges

• Long-term illustrations

• Mortality assumptions

🎯 Key Takeaway

COI charges:

✅ Are a normal part of PPLI

❌ But directly reduce policy cash value and long-term returns

And because COI generally increases with age:

👉 Policy IRR often declines over time.

In practice:

The underlying investments drive growth—but COI determines how much of that growth the policyholder actually keeps.