But contingent annuities have given rise to that anomaly. Also called synthetic annuities, these deferred annuity contracts start income payments when a named contingency, or future event, occurs. The products guarantee a specified stream of withdrawals from the measuring assets, followed by a stream of payments for life when those assets are depleted by certain permissible causes.

The promise that contingent annuities have held for addressing the uncertainty of outliving one’s assets have hung partially in the balance due to lack of clarification of their tax treatment.

Providing a guaranteed income stream would lose much of its luster if it entailed the loss of certain current beneficial tax treatment of the insured’s investments. Well, it doesn’t (entail that loss); that is the latest and only good news for contingent annuities. In November, Phoenix, the initial issuer of a contingent annuity (the Phoenix Guaranteed Income Edge income guarantee), amended its registration statement to say that:

“The Internal Revenue Service has issued rulings indicating that Income Edge is an annuity contract under the Internal Revenue Code. In addition, the Internal Revenue Service has also issued rulings concerning the tax treatment relative to assets in the Account. These rulings provide, in substance, that the tax treatment of the Account is unaffected by the existence of Income Edge.”

That statement has been interpreted to mean that the tax treatment of transactions involving the mutual fund or private managed account investments supporting the annuities’ promises, including redemptions, dispositions and distributions of those investments, will be unchanged by the existence of the related contingent annuity. The private letter ruling on this is not yet publicly available, so additional details on tax treatment must await the letter’s release and review by qualified tax lawyers. Hence, this article is limited to pointing out that the IRS ruling is good news in an otherwise uncertain horizon for these products.

There is another unwelcome certainty. While the IRS found these products to be annuities for tax purposes, the Office of the General Counsel, New York State Insurance Department, eliminated another uncertainty, albeit not in an affirmative manner.

The Department found annuities to be an impermissible form of financial guaranty insurance for New York State insurance law purposes. The June 25, 2009 opinion of the General Counsel stated that contracts it was reviewing for several companies came within the definition of financial guaranty insurance “because it purports to provide indemnification for ‘financial loss’ resulting from ‘changes in the value of specific assets.’”

The New York State Insurance Department’s bad news is important. Contributing to its general importance as bad news is that underlying its views are ones arguably shared by the entire population, insureds and insurers.

The continuing uncertainty of the state of the economy and the markets highlights the concerns of regulators, potential insureds and potential insurers. More generally, among the opinion’s major concerns is that the limitations imposed by New York State insurance law on financial guaranty insurance arose because of “worries that financial guaranty risks could bring down a multi-line insurer, and thereby injure insureds seeking ordinary property or liability insurance.”

The uncertainty (of insureds regarding having sufficient assets for life and of insurers regarding the effect of market volatility on the level of promises and their pricing) creates the paradox. Contingent annuities are products for the very time that makes them challenging. The “certainty” these annuities afford to insureds entails the transfer of risk to insurers that the insurers can’t afford, or at least New York State does not permit them to take.

Given the product’s value in addressing concerns of potential insureds and issuers, the author retains a sense of optimism that a product addressing the regulatory concerns and providing the desired benefits can be fashioned. This doesn’t appear unrealistic given the un-curtailed proliferation of guaranteed minimum withdrawal benefits under variable annuities, with many of the same features as the general account contingent annuities.

A variety of measures and adjustments to product designs should be able to address New York’s concerns, notwithstanding the department’s highly uncomplimentary characterization of the product.

Joan E. Boros, Esq., is of counsel with Jorden Burt LLP, Washington, D.C. Her e-mail address is JEB@jordenusa.com.