For the people who create and sell annuities and other insurance-based retirement planning products, the start of high-energy efforts in Washington to update federal tax rules and programs is creating hope, and fear.

The efforts could make the economy more efficient, put more money in consumers’ pockets, and leave consumers in a better position to prepare for post-retirement income, acute health care and long-term care needs. The changes could even help the world create the kinds of housing, health care advances, long-term care workforce and long-term care technology that could make the aging of the world’s population easier to handle.

(Related: Self-Driving Buses and Robot Aides Could Double Singapore Growth)

The efforts could also strip away whatever meager incentives the U.S. federal government has given consumers, employers and government entities to prepare for post-retirement expenses. The efforts could also encourage consumers, or government agencies, to get at whatever cash is in existing retirement savings arrangements, and blow it on coffee, restaurant meals, cruises, handbags, cell phone apps, and other items and services that do nothing to put your clients, or the United States as a whole, in a better position to cope with the coming demographic shift.

Earlier tax reform efforts have come with risks as well as with rewards.

The 1987 tax reform effort, for example, did clear out some with real estate limited partnerships, and tax evasion strategies often used by high-income taxpayers to escape from sky-high tax rates, but it also contributed to the Oct. 19, 1987, stock market crash, and to the U.S. housing market crash in the early 1990s.

Republicans in Congress took note of concerns about retirement planning in the new tax reform framework summary they released last week.

The framework summary drafters address those concerns in a section on “Work, Education and Retirement.”

“The framework retains tax benefits that encourage work, higher education and retirement security,” according to the Work, Education and Retirement section. “The committees are encouraged to simplify these benefits to improve their efficiency and effectiveness. Tax reform will aim to maintain or raise retirement plan participation of workers and the resources available for retirement.”

But the framework drafters did not give any specifics about annuities, or even about 401(k) plans or individual retirement accounts.

For a look at seven ways the tax fight could hit the annuity community, and the income planning community in general, read on.

NAIFA cartoon (Image: NAIFA)

(Image: NAIFA)

1. The uncertainty could increase the already high uncertainty level.

Groups involved with annuities put out cautious statements expressing the idea that they would like to back the right kind of tax changes.

Dirk Kempthorne, the president of the American Council of Life Insurers, said, for example, that, “ACLI knows how important tax reform is a potential facilitator for economic grow, and we would very much like to support tax reform…. ACLI looks forward to reviewing any legislative text to ensure that it strengthens the private sector safety net that millions of Americans rely on for their financial and retirement security.”

The National Association of Insurance and Financial Advisors said its legislative contacts are working to establish and strengthen relationships with every member of Congress, to boost NAIFA’s capacity to serve as a voice of the industry.

“When NAIFA tells Congress how tax reform will affect our members and the everyday Americans they serve, Congress listens!” NAIFA said. “Together, NAIFA members will help Congress ensure that the tax code works with, not against members’ ability to serve American families and help them prepare for retirement and achieve financial success for decades to come.”

Cathy Weatherford, president of the Insured Retirement Institute, put out a statement calling for policymakers to recognize the critical need to promote retirement security.

“Any tax reform legislation that is developed must continue to provide encouragement to Americans to save for their retirement during their working lives,” Weatherford said.

All that effort to review legislation and reach out to members of Congress takes time and money the groups could be investing, for example, in bigger and better retirement planning awareness campaigns.


2. The tax fight could revive old efforts to tax annuity contract value while it’s growing, or tax distributions from life insurance policies used in retirement planning.

Republicans would seem to be in a position to move the needle the other way, but their friendly proposals could lead Democrats to dust off less friendly proposals.

3. The tax fight could disrupt Medicaid planning strategies.

Sellers of stand-alone long-term care insurance and life insurance-based long-term care planning arrangements might like to see that, but agents who have used annuities in Medicaid planning efforts may have to change the way they do business.

Sen. Bernie Sanders (Photo: Sanders)

Sen. Bernie Sanders (Photo: Sanders)

4. The tax fight could, eventually, replace the current menagerie of savings programs with a few simple savings programs.

In theory, the simplified savings programs could eliminate many regulatory headaches.

In the real world, insurer and advisor groups have argued in response to past savings program simplification efforts, the simplified programs could be set up in such a way that they would encourage Americans to reach into their savings every few years to, for example, buy a boat, or an overpriced house, rather than locking the money away for retirement.

5. The tax fight could disrupt charitable-giving strategies.

Bernie Sanders has already included an attack on grantor-retained annuity trusts in his proposal for funding a universal, government-run health finance system.

The new tax fight could bring more of those kinds of proposals out of Democrats’ file cabinets.

6. The tax fight could lead to upheaval in group health.

Group health has been working well, thanks, in part, to employers’ group health tax exclusion.

The Republicans’ new tax framework summary says nothing about whether they intend to keep that exclusion in place. Traditionally, both Republican and Democratic budget hawks have opposed the group health tax exclusion.

Eliminating the exclusion, combined with other health care system changes, could create new opportunities for insurers to offer annuities, or similar products, as individual health care savings vehicles. But upheaval could also lead to big new distractions for companies, and for the individuals who own or run those companies. That could bite into the amount of time and attention they have to devote to retirement planning for themselves.

Even life insurers with no major medical operations might find themselves too distracted by the side effects of such a huge shift to focus as well as they should on their core life and annuity operations.

7. The tax fight could change complicated tax provisions that have helped life insurers weather regulatory uncertainty and low interest rates.

Life insurers benefit from many tax provisions which are unfamiliar to ordinary people, such as the ability to carry the effects of a net operating loss on taxes forward, or the rules governing taxation of U.S. life insurers’ non-U.S. affiliates.

Changes in those areas could rattle life insurers’ life and annuity operations. 

— Read 5 Ways Scientists Could Supercharge Long-Term Care Insurance on ThinkAdvisor.


– Connect with ThinkAdvisor Life/Health on
Facebook and Twitter.