By Linda Koco
Contributing Editor, AnnuityNews
Contingent deferred annuities may not ring bells with many independent annuity producers today, but that could change as advisors learn more about their value as a guaranteed income stream.
For example, David Schlossberg, a financial advisor with Assured Concepts Group, East Dundee, Ill., says he had not heard anything about the products until recently. But once someone mentioned them, he started researching the products — and he says he grew interested.
CDAs, as they are called, offer consumers a lifetime income guarantee in tandem with investments, but the insurance company does not own or manage the investments. The assets can be invested in a 401(k), a mutual fund account or a managed money account. The guaranteed income stream kicks in when the account assets are depleted. Carriers charge a fee for the guarantee, with fee estimates ranging from 75 to 150 basis points.
What caught Schlossberg’s eye was taxation information he picked up during his CDA research.
“My understanding is that, when CDAs are used with non-qualified investments such as taxable managed money accounts, the client can get a living benefit without putting assets into an annuity wrapper,” he says.
“In addition, the client won’t have to be subject to the ordinary income tax rate that applies to withdrawals from annuities; instead, any withdrawals the client makes from the investment will be taxed at today’s lower capital gains tax rates.”
Schlossberg says his high-net-worth clients might be interested in a product like that. In the current environment, clients in a tax bracket or 30 percent or more tend to prefer capital gains tax treatment over tax-deferred ordinary tax rates, he explains.
“At least, this might be an option for me to discuss with them.”
Those comments came in the wake of a string of conference calls held by a subgroup of the National Association of Insurance Commissioners (NAIC) over the past several months. This is the Contingent Deferred Annuity Subgroup of NAIC’s Life Insurance & Annuities (A) Committee.
The regulatory inquiry is being made to determine whether CDAs should be regulated as annuities. The last such call, on Jan. 26, heard several life insurance company executives and some industry association executives saying yes, the products should be regulated as annuities. But some regulators were dubious, and even one life carrier executive maintained the products are financial guaranty insurance and should be regulated as such.
The missing voice in those conference calls has been the voice from the field. Advisors, distributors and agent associations have not weighed in, not publicly at least. A check with various field people suggests that a key reason might be that many agents just don’t know what CDAs are or don’t see them as something they would handle.
Frances Stickel, annuity marketing manager at Brokerage Professionals, a brokerage general agency in Scottsdale, Ariz., sums it up this way: “Most agents we work with are not familiar with CDAs. Most of their inquiries are about fixed annuity rates, caps in fixed indexed annuities, payouts on single premium immediate annuities (SPIAs), underwritten SPIAs, and annuities with long term care features—but never about CDAs.”
Similarly, Chris Conroy, vice president-advanced marketing at Creative Marketing, an independent marketing organization (IMO) in Leawood, Kansas, says, “we’re not hearing any perspectives on the products, one way or another. It’s just not being discussed—not by agents or by the other IMOs that we know.”
The consensus among advisors seems to be “who cares,” writes Sheryl Moore in an email. Her understanding from agents is that they tend to view CDAs as “a niche sale that is often only an option in very high premium situations with small businesses,” explains the president of AnnuitySpecs.com, Des Moines.
And since the products can be added on to 401(k) retirement savings plans, Moore doubts that advisors who sell 401(k)s would be interested in CDAs because the products would make the plans “too much like an annuity (which those reps typically avoid).”
Lack of education
Schlossberg thinks lack of education and publicity about CDAs are a big factor in agent awareness of the products.
Not that many carriers offer the products, he says, and those that do are not making a major effort to reach agents and advisors about them. For instance, he says, “no wholesalers have brought information about CDAs to me—and I do work with national carriers, and I do have 401(k) plans as well as individual clients.”
The lack of promotion on CDAs could be due to “bad timing,” too, he adds.
The products operate very much like guaranteed living withdrawal benefits (GLWBs) in variable annuities, Schlossberg explains. (As noted earlier, although the insurance company does not hold the underlying investment assets, it does provide a guaranteed income stream for life once the underlying asset is exhausted.) But many carriers have been backing off of their GLWB products or trimming features due to concerns about reserving and their ability to meet obligations in today’s difficult economy, Schlossberg says. So the idea of introducing CDAs, which are a lot like GLWBs, to agents may not be something the carriers want to do, he suggests.
Still, now that Schlossberg knows the products exist, he says he intends to find out more about them, particularly their applications in the individual market.
He is not currently interested in their use in the 401(k) market, however. That is because doubts whether they would fit well with the “open architecture” environment that is developing in the 401(k) marketplace. The plans are moving toward providing more choices to plan participants and full fee disclosure, he notes, and that is leading plans sponsors to prefer low/lower cost mutual funds and providers.
“I just don’t know how successful the carriers will be in getting this full-fee disclosure, open architecture world to add a CDC.”
If the plans do provide the CDD option, he says he doubts that many of the younger plan participants will elect it, and pay a fee for it, because they have so many years to go until retirement.
It is clear from the NAIC conference calls that there is still uncertainty over how the products will be regulated. Issues being addressed include not only whether the main question of whether the products are annuities (a product sold by life insurers) or financial guaranty insurance (a product sold by property-casualty insurers). They also include whether CDAs come under state guaranty fund laws; whether the products have nonforfeiture—or as one regulator phrased it, contingent nonforfeiture—provisions; whether they are being actively sold; and what is the sales volume.
Taxation issues have been raised as well. The Internal Revenue Service has issued several Private Letter Rulings (PLRs) that address this, essentially treating the products, from a tax perspective, as annuities, but with subtleties that need close study. The PLRs include: 201117012, 201117013, 201105004, 201105005, 201001016, 200949036, and 200949007.
All of this inquiry into CDAs is playing out over the broad issue of the much publicized need for new ways for consumers to be able to insure against the risk of outliving their assets. J. Lee Covington, senior vice president and general counsel for the Insured Retirement Institute, touched on that point in a letter he submitted to the NAIC subgroup.
He pointed out how changes in the retirement world—such as the shift from defined benefit to defined contribution plans, longer life expectancies and the rising cost of health care--are putting a burden of retirement savings. In view of that, Covington argued that it is “critically important” for the regulatory environment to encourage companies to create insured longevity risk protection products “like contingent annuities and other annuities.”
Also needed, he said, is “a regulatory environment that provides consumers access to products that meet their needs to protect against longevity risk.”
Whether the CDA will be among those products and regulated as an annuity is not yet known. But advisors like Schlossberg will likely start keeping tabs on the outcome.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at email@example.com.
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