151A yae or nae?

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PostPosted: Mon Aug 17, 2009 5:29 am   Post subject: 151A yae or nae?  

Quote:
I read that as from 2011 certain life and annuity products will no longer recieve government tax benefits (151A)


Can someone clarify this assumption for me? I've been reading up on rule 151A and it mentions that Equity Indexed Annuities will no longer be termed "insurance products". I assume they will be "investment products" therefore they will lose certain tax benefits is this true? I mean, how can EIA be an investment product and still recieve insurance-like tax benefits?



I can understand retirement products recieving tax benefits since they are a form of income protection but why would an investment product, if it is termed so, recieve the same special treatment?



Also other than EIAs are there any other products that may be included in 151A as investment products?



Finally, I ask; so what? If there is no difference in tax benefits the only difference I see is that you all have to get your secuirities licience. There is no knowledge that is not power n' all that, quit complaining and hit the books. I mean if your company is paying or you can write it off in taxes why not?
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PostPosted: Mon Aug 17, 2009 7:40 pm   Post subject:   

denardo, you're assumption is not correct.



The change is not that they will no longer be insurance products. They will still be considered insurance products. It's just that they would be also be considered securities. They would be both just like a variable annuity is both.



The taxation will remain identical. The taxation of all annuities is the same regardless of whether they are securities or not. The tax "benefits", in general, have more disadvantages than advantages.



First of all, keep in mind that if they are in an IRA, they will be taxed identical to anything else in an IRA. If it's not qualified money, the money will grow tax deferred, but the disadvantages are quite large:



1)All gains taxed as income.

2)Gains come out first.

3)Penalties prior to age 59 1/2

4)No step-up in basis at death

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PostPosted: Mon Aug 17, 2009 7:48 pm   Post subject:   

Quote:
Finally, I ask; so what? If there is no difference in tax benefits the only difference I see is that you all have to get your secuirities licience. There is no knowledge that is not power n' all that, quit complaining and hit the books. I mean if your company is paying or you can write it off in taxes why not?




The "so what" is huge. First of all, there is the priciple of the thing. In no way, shape, or form, is an EIA a security. It is no more of a security than a savings account or a traditional fixed annuity. This is nothing more than a power grab.



Additionally, one can't just study and get a securities license. In order to take the series 6 or 7, one must be sponsored by a broker-dealer. One would then have to stay employed by a b/d in order to sell the product or be an independent rep for a b/d. Many b/ds won't allow their reps to sell these products. Becoming a rep of a b/d comes with some serious downsides.



For instance, a b/d has to approve all outside business activities. This means that they control what FIXED insurance products can be sold. Heck, a b/d can even stop their reps from waiting tables on the weekend. Nothing can be done without b/d approval.
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PostPosted: Tue Aug 18, 2009 12:45 am   Post subject:   

Thanks InsuranceExpert

That clears up a lot.



Got a few questions on your post though:

Quote:
1)All gains taxed as income.

2)Gains come out first.

3)Penalties prior to age 59 1/2

4)No step-up in basis at death




2) Do you mean the gains are taxed at the rate when they were first realized? As apposed to when the policy is collected?



4) Do you mean there is no death benefit over and above the cash amount of the policy if the policy holder dies?



Also out of curiosity



What retirement product do you recommend for your clients?

Which is better for maximizing returns in preperation for retirement (regardless of the life insurance aspect)? Will IUL also become regulated by the SEC or is it just EIAs?



Thanks again
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PostPosted: Tue Aug 18, 2009 1:58 am   Post subject:   

2)

Quote:
Do you mean the gains are taxed at the rate when they were first realized? As apposed to when the policy is collected?




Ex. Jim puts $40,000 into a non-qualified (not a retirement account) annuity. It will grow tax deferred. After a bunch of years, the value is now $83,000. Jim wants to take money out of his annuity. The first $43,000 that he takes out will be taxed as ordinary income.



Quote:
4) Do you mean there is no death benefit over and above the cash amount of the policy if the policy holder dies?




That's not what I mean. That has to do with the contractual terms. More often than not the death benefit will equal the contract value. Here's what I meant:



Ex. Jim puts $40,000 into a non-qualified annuity. It grows tax deferred. After a bunch of years, it has grown to $83,000. He dies and his son is the beneficiary. His son collects the $83,000 and must pay tax on a $43,000 gain. If this money was in a different vehicle, it would get a step-up in basis. This means that the son’s basis would become $83,000, so there would be no tax.
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PostPosted: Tue Aug 18, 2009 2:01 am   Post subject:   

Quote:
Also out of curiosity



What retirement product do you recommend for your clients?

Which is better for maximizing returns in preperation for retirement (regardless of the life insurance aspect)? Will IUL also become regulated by the SEC or is it just EIAs?




Every situation is different. In most cases, it is a variety of products, but I tend to not use annuities for non-qualified money.



I don't know the answer to your IUL question. It shouldn't be just like EIAs shouldn't be regulated. We'll see if this ultimately gets implemented or not. Do you understand why it makes no sense for EIAs and IULs to be considered securities?
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PostPosted: Tue Aug 18, 2009 4:30 am   Post subject:   

Thanks again



Quote:
Ex. Jim puts $40,000 into a non-qualified annuity. It grows tax deferred. After a bunch of years, it has grown to $83,000. He dies and his son is the beneficiary. His son collects the $83,000 and must pay tax on a $43,000 gain. If this money was in a different vehicle, it would get a step-up in basis. This means that the son’s basis would become $83,000, so there would be no tax.




Is this "step up in basis" another term for no estate tax? From what I can see it's the same thing.



Quote:
Do you understand why it makes no sense for EIAs and IULs to be considered securities?




Actually I don't see why IULs and EIAs could be labelled securities as the downside risk still lies with the insurer. Variable products I see as more like securities. In fact I found that VA have a strong correlation to the S&P 500 (r = 0.66). Additional findings show more people see VAs for their investment value rather than insurance value.
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