There’s no place like home… but when it comes to annuities, your home may not be the best place for you. The annuity you purchase in Texas most likely will not be the same as what you buy in California – even if it is the same company and annuity by name.
Does it matter? You bet, it does…
Annuity policy requirements differ by state for various reasons. Oftentimes, the differences are due to…[continued below video]
Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
[continued]…state regulations on what can be offered in each state. Those differences may indicate heightened consumer protections in some states, which limit options; while other states are willing to allow more benefits and growth potential. There are annuities in some states that have long-term care riders and other provisions that are “either prohibited or too expensive” due to regulations, yet, other states keep them available and affordable! (Go figure?)
Some key aspects which differ by state are the use of market value adjustments, free-look provisions, the coverage provided by each states **guaranty association, and the levy of a premium tax.
The least well-known of these is probably the use of a premium tax in six states that impose a tax on income when you purchase an immediate annuity or annuitize a deferred annuity. This tax ranges from one to three and a half percent. So, annuitants in a state with a two percent tax will receive two percent less in income than those who obtain their annuity in a state without any premium tax.
Each state has very specific regulations which impact the design and function of the annuities approved for purchase in that particular state.
The next question that usually comes up is: Can I purchase an annuity in another state that is more beneficial? The answer is “maybe”. Typically, you can only purchase an annuity that has been approved for the state you are living in; however. if you happen to have homes in multiple states, you can legitimately purchase an annuity when you are at either locations. Regulations prohibit you from being able to purchase an annuity in a state if the only reason you had for being there was to buy the annuity. (It might be the time to “rent that beat up vacation trailer-home you have always NEVER dreamed of”. Lol)
Want more information on this topic? Check out this Investment News article on premium tax.
Under-the-radar taxes pose big planning challenges for financial advisers
Don’t be alarmed, but did you know that a handful of states slap premium taxes on carriers for annuities — and that some of that expense is being passed onto clients?
The practice has been ongoing for years, but it’s largely been taking place under clients’ noses. It’s modeled into the quote investors receive.
It’s not all that different from the tax nearly all states currently levy on life insurance premiums — and that’s been going on since the 1800s, according to Leonard Wright, a certified public accountant and personal finance specialist.
There are currently eight jurisdictions that apply state premium taxes to clients’ deposits into annuity contracts: California, Florida, Maine, Nevada, Puerto Rico, South Dakota, West Virginia and Wyoming. The tax applies based on the residence of the buyer.
“Life insurers aren’t taxed on net income but on the gross premiums in each state,” said Jim Hall, regional vice president at the American Council of Life Insurers, an industry advocacy group. “The annuity tax works like a premium tax on the gross amount received.”
Naturally, life insurance and annuities are priced with the expectation that the state in which the client resides will take its slice of the premium dollars. This way, the company pays the tax and the expense is subsequently deducted from the client.
Rates for non-qualified annuities, according to the ACLI, include: California: 2.35%; Florida: 1%; Maine: 2%; Nevada 3.5%; Puerto Rico: 1%; South Dakota: 1.25%; West Virginia 1% and Wyoming: 1%.
For qualified annuities, California taxes insurers at a 0.5% rate. In Florida, Puerto Rico and West Virginia, they are taxed at 1%. The remaining jurisdictions — Maine, Nevada, South Dakota and Wyoming — do not tax qualified annuities.
In Florida, insurers are exempt from the annuity premium tax if they can show that they’ve passed the savings onto the policyholders in that state.
The extent to which an insurer passes the expense tied to the premium tax to the client varies from one insurer to another. Some companies pass on the full tax amount to the client. read More at Investment News
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