Guest Article

PPA Provisions Reflect Unique Role of Life Insurance in Providing Retirement Security

By Jack Dolan
American Council of Life Insurers
August 16, 2006

With President Bush planning to sign into law tomorrow pension reform legislation, I'd like to point to two provisions of the bill that illustrate the unique role the life insurance industry is playing -- and will continue playing -- in boosting Americans' retirement security.

One provision will make long-term care insurance more attractive to consumers. The other will help ensure that more of tomorrow's retirees will enjoy the guarantee of lifetime income offered by annuities that retirees from traditional "defined benefit" plans receive today.

The long-term care provision allows for the combination of long-term care insurance with annuities. Historically, the tax code has barred the combination of the two for no good reason.

When this provision becomes effective in 2010, life insurance companies will be able to provide consumers with an annuity that carries a long-term care insurance rider. Policies will differ from company to company, of course. But here is how the new law could work for a consumer under one scenario we're likely to see in the future:

He or she is receiving retirement income from their annuity (and paying taxes on the part of the payout representing earnings). Two "qualifying events" trigger the need for long-term care services. These qualifying events could include chronic impairment and the need for assistance in feeding or bathing. At such a point the policy could begin to pay a long-term care insurance benefit. These amounts would be received tax free. If the long-term care payments were less than the annuity amount, the difference would continue to be paid as an annuity.

The bill also makes clear that the cash value of a life insurance policy can be used to fund a long-term care insurance rider without being taxed. There had been some questions about this combination before that now have been answered by the pension reform bill. ACLI believes that consumers will find annuities and life insurance, when combined with long-term care insurance, to be flexible products that can address a variety of retirement security needs.

The provision of pension reform that will ensure more workers have access to a lifetime stream of income through an annuity directs the Secretary of Labor to rewrite rules under the Employee Retirement Income Security Act (ERISA). The new rules, to be drafted within one year, will clarify ERISA's "safest available annuity" standard, a move which will encourage more employers to offer annuities as a distribution option to plan participants. Heretofore, employers have been reticent to offer lifetime annuities from defined contribution plans out of concern for tripping over the safest available annuity standard. Determining exactly the "safest available annuity" for many employers, especially those lacking expertise in financial matters, is such a vexing task that many employers decide simply not to provide an annuity option in their plans. The new law provides common sense relief to employers who would like to offer a lifetime income option from an annuity to workers at retirement.

The need for this change is clear. More and more workers are relying on 401(k)s and other defined contribution plans for their retirement income. They don't typically turn their accumulated plan value into a lifetime income stream. This provision gives participants the opportunity to turn all or a portion of their assets from a 401(k) into a lifetime income stream, thereby relieving themselves from the risks and burdens of managing money over an extended retirement.

To be sure, the pension reform legislation contained numerous other provisions of keen interest to life insurers. These included provisions that:

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