Life Insurance, Annuities and R&D Tax Credits

What You Need to Know

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

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

Insurance technology advances make life easier for both customers and agents, from customers reporting a claim to agents interfacing with clients.

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

As a result, digital experiences, technology solutions, operational efficiencies, and process automation are all on strategic roadmaps for insurtechs.

Fortunately, America’s largest tax incentive, the research and development (R&D) tax credit, applies to life insurance and annuity distributors developing software and other technology solutions.

Unfortunately, there are companies that either don’t embrace the creation of innovative proprietary technologies or are unaware of how best to handle the R&D tax credit process.

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

1. The History

Each year, the federal government provides billions of dollars to innovative businesses for developing and improving technologies, products, and processes.

The R&D tax credit was created in 1981, as part of the Economic Recovery Tax Act.

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

This spending could include costs associated with developing a patent, a new product or service offering, or even a new technology that was 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 expanded its benefits to startups and

small businesses.

Starting in 2016, early-stage businesses, including insurance industry-related fintech startups, could use the credit to eliminate up to $250,000 per year in federal payroll taxes.

2. The Applicability: Insurance Use Cases/Insurtechs

In 2021, venture capital firms invested over $11 billion in insurtechs, doubling the total amount from the previous year.

From car to home to life insurance, there have been significant advances fueled by technology that makes it easier for both the customer and agent to do business.

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

Now that everyone has a smartphone available, customers are accessing sites that compare plans and are changing insurance providers like never before.

Apps are available at the ready, so customers can easily check the status of their accounts or claims. And life and annuity distribution companies that don’t offer this innovative technology risk clients switching to competitors. The “attention economy” has become a buzzword for insurers everywhere.

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