Hailed as one of the most significant pieces of legislation affecting the ways Americans save for retirement, the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 made much-needed changes to retirement plans and provisions relating to life insurance products.
While the bill added plenty of provisions and changed standard pieces of tax planning, many felt it didn’t go far enough. They needed further reform, hence the introduction of The SECURE Act 2.0, the latest bill waiting to pass legislation that will make more changes to retirement plans and annuities.
The bill was passed in March by The House of Representatives and is expected to be ready to be signed by President Biden by the end of the year.
In anticipation of this, we will take a closer look at how the SECURE Act 2.0 influences the life insurance industry with regard to annuities.
When purchasing an annuity, one can specify when they want the income stream to start. However, the maximum that can go into a qualified longevity annuity contract is the lesser of $135,000 or 25% of your retirement account. The Act would remove the 25% cap and potentially increase the maximum amount allowed in the annuity contract to $200,000.
Currently, the IRS mandates a minimum annual withdrawal amount from tax-deferred retirement accounts, such as annuities, from age 72. That means, at age 72, one must start taking money out of their retirement accounts and paying taxes. If passed, the Act would raise that age to 75, allowing people more years to grow their investments before paying taxes on them. This age increase can potentially increase revenue for carriers as well, as a few more years of premiums would be paid before withdrawals are made.
Employers can choose a group annuity to include within a 401(k) or similar plan. If passed, the Act would shift liability risk from the business owner to the insurance company, relieving businesses of any reliability risk they might be prone to from before.
The Act would require yearly disclosures illustrating how much the participant can receive if the account balance is used to provide a lifetime income stream during retirement. In addition, the Act would allow employees who purchase an annuity in their 401(k) to transfer it to a different employer 401(k) or IRA plan without paying surrender charges or penalties.
For Life and Annuity Providers
The world is changing and so are people’s finances. Life and Annuity providers need to understand the SECURE Act to stay ahead of the game and cater to their customers’ changing financial needs. With its ability to predict trends in customer behavior, companies that adopt AI and ML technologies will be able to design new products for people whose financial situation has changed due to the economic situation. Increasing retention and providing better customer service will put companies using AI and ML technologies at an advantage over their competitors.
The SECURE Act is a sweeping piece of legislation that makes changes to retirement plans and provisions relating to life insurance and annuities. While some of the changes are welcome, others have been met with criticism from industry professionals. It will be interesting to see how the industry adapts to the new law and its impact on American workers’ retirement planning.