Life insurance, annuities and R&D tax credits

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What do you want to know

  • The 2015 PATH Act extended the tax credit to startups and small businesses.
  • Insurtech companies can use the credit to eliminate up to $250,000 in federal payroll taxes.
  • One of the challenges is documenting compliance.

The life insurance and annuity industries are changing with the times and becoming more tech-savvy.

Technological advances in insurance are making life easier for customers and agents, from customers reporting a claim to agents in contact with customers.

Insurtech also helps insurance companies stay visible in a crowded market.

Therefore, digital experiences, technology solutions, operational efficiency and process automation are all on the strategic roadmaps of insurtechs.

Fortunately, the biggest US tax incentive, the Research and Development (R&D) Tax Credit, applies to life insurance and annuity distributors who develop software and other technology solutions. .

Unfortunately, some companies do not embrace the creation of innovative proprietary technologies or do not know how to best manage the R&D tax credit process.

Here are three important pieces of the R&D puzzle that every company needs to know to optimize and defend their R&D tax credits:

1. History

Every year, the federal government provides billions of dollars to innovative companies to develop and improve technologies, products and processes.

The R&D tax credit was created in 1981, as part of the law on economic recovery taxation.

The original version provided a temporary tax credit of up to 13% on qualified research expenditure on products and processes that had been developed or improved through the application of the principles of physical science, biological sciences, computer science or engineering.

These expenses can include costs associated with the development of a patent, a new product or service offering, or even new technology that has been sold to third parties.

Then, in 2015, the Protecting Americans from Tax Hikes Act, or PATH Act, permanently extended the R&D tax credit and extended its benefits to startups and

small enterprises.

Starting in 2016, start-ups, including insurance-related fintech startups, could use the credit to eliminate up to $250,000 a year in federal payroll taxes.

2. Applicability: Insurance/Insurtech Use Cases

In 2021, venture capitalists invested more than $11 billion in insurtechs, doubling the total amount from the previous year.

From auto insurance to home insurance to life insurance, significant advances have been made in technology that makes doing business easier for both the customer and the agent.

In today’s world, developing technology to interact with and attract new customers is simply a cost of doing business in the insurance industry, and R&D credit can significantly reduce that cost.

Now that everyone has a smartphone, customers are accessing sites that compare plans and switch insurers like never before.

The apps are ready to use, so customers can easily check the status of their accounts or claims. And life insurance and annuity distribution companies that don’t offer this innovative technology risk tipping their customers to competitors. The “attention economy” has become a buzzword for insurers around the world.

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