How COI Charges Impact PPLI Returns

One of the most important—but least understood—factors affecting Private Placement Life Insurance (PPLI) performance is:👉 COI — Cost of Insurance chargesThese charges can materially affect long-term policy returns, especially over time.⚖️ 1️⃣ What Is COI?COI stands for:👉 Cost of InsuranceIt represents the recurring insurance expense charged by the carrier for:• Mortality risk • Policy administration • Insurance coverage obligations💸 2️⃣ How COI Affects Policy PerformanceCOI charges are deducted from:• The policy’s cash valueThis means:👉 Less money remains invested inside the policy.📉 3️⃣ Direct Impact on ReturnsBecause COI functions as an ongoing expense:• It reduces:Net investment growthCompounding efficiencyLong-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 TimeA critical feature of many policies:👉 COI charges generally increase with age.As the insured gets older:• Mortality risk rises • Insurance expenses increaseResult:⚠️ The drag on returns tends to grow over time.🧠 5️⃣ Long-Term IRR CompressionThis creates a common pattern:Early Years✅ Lower COI impact ✅ Stronger net compoundingLater Years⚠️ Rising COI charges ⚠️ Reduced net cash value growth ⚠️ Declining long-term IRR🌍 6️⃣ Why This Matters in PPLIPPLI is often used for:• Long-term wealth accumulation • Multi-generational planning • Alternative investment exposureBecause these policies may last decades:👉 Small COI differences can produce very large long-term effects.⚠️ 7️⃣ The Hidden RiskIf investment performance slows while COI rises:• Policy cash values may erode faster than expected.This can increase:⚠️ Funding pressure ⚠️ Liquidity needs ⚠️ Risk of policy lapseUnder the Internal Revenue Code, a lapse with gains may create:❌ Ordinary income taxation📄 8️⃣ Why Carrier Selection MattersDifferent carriers may structure COI differently.Due diligence should review:• COI schedules • Guaranteed vs non-guaranteed charges • Long-term illustrations • Mortality assumptions🎯 Key TakeawayCOI charges:✅ Are a normal part of PPLI ❌ But directly reduce policy cash value and long-term returnsAnd 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.