Financial services companies took years to create and popularize the modern versions of the health savings account, the Medicare Advantage plan and the life insurance policy.
Now, they might be getting closer to making the "contingent deferred annuity" — a lifetime withdrawal benefit guarantee, or income spigot, that can be attached to an ordinary investment account — an everyday product.
A small insurer, Merit Life, was a pioneer in the market, and the RetireOne annuity exchange has worked with Sammons' Midland National to get the CDA annuity spigots some love.
Prudential Financial made a splash Tuesday by appearing in an announcement about a contingent deferred annuity effort that Fiduciary Exchange LLC, the parent of the FIDx insurance exchange, is organizing together with Dimensional Fund Advisors, an asset manager.
Prudential turned out to have a Form S-3 registration statement for the contract on file at the U.S. Securities and Exchange Commission, and that SEC filing and others shed light on a product that could fizzle out or could be the next HSA.
What it means: If you are interested in where baby annuity products come from, the SEC filings for CDA contracts and the Internal Revenue Service private letter rulings described in the filings are the cabbage patch.
Filings and letters: Prudential notes in its SEC filings that its CDA contract relies on private letter rulings, or company-specific IRS interpretations, that were issued in 2022.
In one of the letters, the IRS approves a product description stating that the assets protected by the CDA income spigot could include "shares in mutual funds, exchange traded funds, other pooled investment vehicles such as real estate investment trusts; individual securities such as bonds, notes, common stock, preferred stock, and derivatives; and any other interest commonly known as a 'security,' including interests in commodities."
Prudential notes that it might restrict the use of "exotic" investments," such as assets that are not priced daily and investments that are not registered with the SEC.
Merit Life says in an SEC filing that it has reviewed CDA contract private letter rulings going back to 2009.
According to the filing, the firm believes that its CDA contracts will be treated as annuities for income tax purposes but that the topic is complicated.
"Federal tax law may be interpreted by the IRS to require that some benefit amount be paid once the Annuitant reaches a certain age to be specified in the Contract for the Contract to be considered an annuity," Merit Life says. "Since we require that you take your first withdrawal not later than the Annuitant's 95th birthday, we believe we are in compliance with such an interpretation."
Jackson Financial has been talking to the SEC about creating a CDA contract prospectus.
A draft included in SEC correspondence posted in February 2024 shows that the Jackson National Life Insurance Co. subsidiary's "Retirement Income Protection Contingent Deferred Annuity" could provide a guaranteed minimum withdrawal benefit for investors with investment accounts at financial institutions approved by Jackson. The minimum activation age could be 60, and it might be available with individual retirement accounts as well as accounts that do not qualify for any special tax treatment.
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