Recent Legislative Change Provides Tax-Advantaged Financial Planning Opportunity

Sec. 2113 of recently enacted H.R. 5297, otherwise known as the Small Business Lending Fund Act of 2010, appears to present insurers who also hold many annuity funds an interesting financial planning opportunity for their clients and members.

Prior to this change, the entire annuity fund balance had to be annuitized in order to receive the favorable "exclusion ratio" tax treatment offered to owners of income annuities. However, the new law now allows contract holders to receive this favorable tax treatment upon annuitizing only a part of the fund balance, with the requirement that annuity payment period is 10-years-certain or more or over the life of the annuitant.

Insurers currently offering 10-pay life products may recommend to select annuity contract holders -- specifically those for whom these annuity funds are not allocated as part of their retirement income expectation -- that this may be a good opportunity to move some annuity money into life insurance. This would be done by partially annuitizing a specified amount of the annuity funds into a 10-year-certain, annual-pay settlement option, at a payment amount equal to the annual premiums of a 10-pay life plan.

The appeal of this opportunity for the annuitant is that the taxation of the withdrawal would be spread over the 10-year period, with the result being tax-free life insurance proceeds for the chosen beneficiary upon death. Additionally, for the insurer, the legislation provides a vehicle for moving annuity products (especially those with high interest guarantees) into permanent life insurance. Furthermore, the appeal of partial (versus full) annuitization is that it allows the insurer to control the amount of life insurance, and thus provide flexibility for navigating the various underwriting guidelines facing the purchaser.

For more information, please see p. 63-64 of the PDF of the Act.