A successful entrepreneurial friend regularly recites this mantra: the most brilliant idea is only good if it is launched at the right time. An article published in Expect Focus, Vol. IV Fall 2008 speculated that the convergence of the concerns of the numerous aging “boomers” over outliving their assets with anticipated continuing uncertainties and volatility of the markets would create the Right Time for Guaranteed Deferred Annuities (GDAs). Guarantees would take on new meaning, and GDAs would radiate brilliance. Despite favorable signals from the IRS and continued fertile conditions, however, GDAs’ time has not yet arrived.  

Since our last article, the IRS has issued a series of private letter rulings (PLRs) favorably resolving most of the significant tax issues regarding GDAs, including a holding that a GDA issued by an insurer that guarantees the lifetime income stream if the investment fund is depleted will be considered an annuity for income tax purposes by the IRS and that payments under the contract will be treated as “amounts received as an annuity.” Although PLRs can only be relied upon by the taxpayer that obtains the PLR, they are useful in ascertaining the views of the IRS.  

Despite this and other encouraging news, regulatory and pricing uncertainties persist. One rather large cloud appeared on June 25, 2009 when the New York State Insurance Department issued an opinion stating that contracts it was then reviewing came within the definition of financial guaranty insurance “because [they] purport[ed] to provide indemnification for ‘financial loss’ resulting from ‘changes in the value of specific assets[,]’” and were an impermissible form of financial guaranty insurance under New York’s insurance law. This is significant because other states are currently considering adopting variations on New York’s position.  

The potential migration of the New York position dwarfs the favorable PLRs and the SEC’s developments. It also currently pre-empts the pricing issue, which remains unchanged – the volatility and uncertainty of the markets that should drive boomers to GDAs makes it difficult for insurers to cover the costs of their hedging transactions, and the potential strain of their reserving requirements, while pricing the product at saleable levels. One valuable uncertainty: it is not clear that GDAs’ time has passed.