Are regulators ALWAYS looking after consumer's best interests?
Updated: Dec 28, 2019
Today, I received an email notification from a large annuity insurance company. It was based primarily on compliance and regulations, but this line really stood out to me: California only: Unfortunately, the Nursing Care and Terminal Illness Rider will no longer be available on any [insert insurance company name here] products.
This company is not the only one. I've looked with many companies and the vast majority of companies have discontinued these riders for California residents. These waivers of surrender charge or other riders are MEANT for the client to have access to their annuity funds without surrender charge - a client benefit.
Why on earth would a regulator prevent such a client benefit?
I have a theory.
They want there to be an obstacle to the insured or annuitant to AVOID touching these assets. Why? 1) So they can be taxed as ordinary income upon withdrawal each year for the life of the insured. (Granted - qualified medical expenses are tax-deductible, but check with your tax professional.) 2) So that those who INHERIT these accounts will pay full ordinary income tax upon withdrawal WITHOUT having a qualified medical expense to offset that tax. If your adult children inherit these accounts, these accounts will be fully taxable at THEIR TOP TAX RATE, rather than being taxed at the potentially lower taxes of the retiree.
Is that REALLY what they're thinking? I don't know. It fits the narrative and it makes annuities less attractive for retirement funds in California than it was in the past.
There is another possibility: There may be some additional health insurance sharing of information regulation (beyond Federal HIPAA requirements) that prevent insurance companies from being able to verify health status to waive these surrender charges. I've been told that this is more of the reason... but, in my opinion, if the CA DOI was for the consumer, they'd find a way to make this work.
I don't hate annuities. On the contrary, I think they can be fantastic! I just find that sometimes their benefits are becoming lower and lower over time than what I've seen many years ago... at least in California.
There is ANOTHER alternative where we can use the current tax code to transfer your IRS regulated retirement plan from "forever taxed" to "never taxed". PLUS these 'accounts' have additional benefits for both nursing home confinement AND/OR terminal illness! (Subject to the terms and conditions of the 'account'.)
David H. Kinder | Lifetime Tax & Wealth Educator Dynamic Advanced Insurance, Financial, and Retirement Strategies