§ 7702.
Life insurance contract defined
(a)
General rule
For purposes of this title, the term “life insurance contract” means any contract which is a life insurance contract under the applicable law, but only if such contract—
(1)
meets the cash value accumulation test of subsection (b), or
(2)
(A)
meets the guideline premium requirements of subsection (c), and
(B)
falls within the cash value corridor of subsection (d).
(b)
Cash value accumulation test for subsection (a)(1)
(2)
Rules for applying paragraph (1)
Determinations under paragraph (1) shall be made—
(A)
on the basis of interest at the greater of the applicable accumulation test minimum rate or the rate or rates guaranteed on issuance of the contract,
(B)
on the basis of the rules of subparagraph (B)(i) (and, in the case of qualified additional benefits, subparagraph (B)(ii)) of subsection (c)(3), and
(C)
by taking into account under subparagraphs (A) and (D) of subsection (e)(1) only current and future death benefits and qualified additional benefits.
(3)
Applicable accumulation test minimum rate
For purposes of paragraph (2)(A), the term “applicable accumulation test minimum rate” means the lesser of—
(A)
an annual effective rate of 4 percent, or
(B)
the insurance interest rate (as defined in subsection (f)(11)) in effect at the time the contract is issued.
(c)
Guideline premium requirements
For purposes of this section—
(2)
Guideline premium limitation
The term “guideline premium limitation” means, as of any date, the greater of—
(A)
the guideline single premium, or
(B)
the sum of the guideline level premiums to such date.
(3)
Guideline single premium
(B)
Basis on which determination is made
The determination under subparagraph (A) shall be based on—
(i)
reasonable mortality charges which meet the requirements prescribed in regulations to be promulgated by the Secretary or that do not exceed the mortality charges specified in the prevailing commissioners’ standard tables as defined in subsection (f)(10),
(ii)
any reasonable charges (other than mortality charges) which (on the basis of the company’s experience, if any, with respect to similar contracts) are reasonably expected to be actually paid, and
(iii)
interest at the greater of the applicable guideline premium minimum rate or the rate or rates guaranteed on issuance of the contract.
(C)
When determination made
(D)
Special rules for subparagraph (B)(ii)
(i)
Charges not specified in the contract
(E)
Applicable guideline premium minimum rate
(4)
Guideline level premium
(d)
Cash value corridor for purposes of subsection (a)(2)(B)
For purposes of this section—
(2)
Applicable percentage
(e)
Computational rules
(1)
In general
For purposes of this section (other than subsection (d))—
(A)
the death benefit (and any qualified additional benefit) shall be deemed not to increase,
(B)
the maturity date, including the date on which any benefit described in subparagraph (C) is payable, shall be deemed to be no earlier than the day on which the insured attains age 95, and no later than the day on which the insured attains age 100,
(C)
the death benefits shall be deemed to be provided until the maturity date determined by taking into account subparagraph (B), and
(D)
the amount of any endowment benefit (or sum of endowment benefits, including any cash surrender value on the maturity date determined by taking into account subparagraph (B)) shall be deemed not to exceed the least amount payable as a death benefit at any time under the contract.
(2)
Limited increases in death benefit permitted
Notwithstanding paragraph (1)(A)—
(A)
for purposes of computing the guideline level premium, an increase in the death benefit which is provided in the contract may be taken into account but only to the extent necessary to prevent a decrease in the excess of the death benefit over the cash surrender value of the contract,
(B)
for purposes of the cash value accumulation test, the increase described in subparagraph (A) may be taken into account if the contract will meet such test at all times assuming that the net level reserve (determined as if level annual premiums were paid for the contract over a period not ending before the insured attains age 95) is substituted for the net single premium, and
(C)
for purposes of the cash value accumulation test, the death benefit increases may be taken into account if the contract—
(i)
has an initial death benefit of $5,000 or less and a maximum death benefit of $25,000 or less,
(ii)
provides for a fixed predetermined annual increase not to exceed 10 percent of the initial death benefit or 8 percent of the death benefit at the end of the preceding year, and
(iii)
was purchased to cover payment of burial expenses or in connection with prearranged funeral expenses.
For purposes of subparagraph (C), the initial death benefit of a contract shall be determined by treating all contracts issued to the same contract owner as 1 contract.
(f)
Other definitions and special rules
For purposes of this section—
(1)
Premiums paid
(B)
Treatment of certain premiums returned to policyholder
(C)
Interest returned includible in gross income
(5)
Qualified additional benefits
(A)
In general
The term “qualified additional benefits” means any—
(i)
guaranteed insurability,
(ii)
accidental death or disability benefit,
(iii)
family term coverage,
(iv)
disability waiver benefit, or
(v)
other benefit prescribed under regulations.
(B)
Treatment of qualified additional benefits
(C)
Treatment of other additional benefits
In the case of any additional benefit which is not a qualified additional benefit—
(i)
such benefit shall not be treated as a future benefit, and
(ii)
any charge for such benefit which is not prefunded shall not be treated as a premium.
(6)
Premium payments not disqualifying contract
(7)
Adjustments
(B)
Rule for certain changes during first 15 years
If—
(i)
a change described in subparagraph (A) reduces benefits under the contract,
(ii)
the change occurs during the 15-year period beginning on the issue date of the contract, and
(iii)
a cash distribution is made to the policyholder as a result of such change,
section 72 (other than subsection (e)(5) thereof) shall apply to such cash distribution to the extent it does not exceed the recapture ceiling determined under subparagraph (C) or (D) (whichever applies).
(C)
Recapture ceiling where change occurs during first 5 years
If the change referred to in subparagraph (B)(ii) occurs during the 5-year period beginning on the issue date of the contract, the recapture ceiling is—
(i)
in the case of a contract to which subsection (a)(1) applies, the excess of—
(I)
the cash surrender value of the contract, immediately before the reduction, over
(II)
the net single premium (determined under subsection (b)), immediately after the reduction, or
(ii)
in the case of a contract to which subsection (a)(2) applies, the greater of—
(I)
the excess of the aggregate premiums paid under the contract, immediately before the reduction, over the guideline premium limitation for the contract (determined under subsection (c)(2), taking into account the adjustment described in subparagraph (A)), or
(II)
the excess of the cash surrender value of the contract, immediately before the reduction, over the cash value corridor of subsection (d) (determined immediately after the reduction).
(D)
Recapture ceiling where change occurs after 5th year and before 16th year
(E)
Treatment of certain distributions made in anticipation of benefit reductions
(8)
Correction of errors
If the taxpayer establishes to the satisfaction of the Secretary that—
(A)
the requirements described in subsection (a) for any contract year were not satisfied due to reasonable error, and
(B)
reasonable steps are being taken to remedy the error,
the Secretary may waive the failure to satisfy such requirements.
(9)
Special rule for variable life insurance contracts
(10)
Prevailing commissioners’ standard tables
(11)
Insurance interest rate
For purposes of this section—
(A)
In general
The term “insurance interest rate” means, with respect to any contract issued in any calendar year, the lesser of—
(i)
the section 7702 valuation interest rate for such calendar year (or, if such calendar year is not an adjustment year, the most recent adjustment year), or
(ii)
the section 7702 applicable Federal interest rate for such calendar year (or, if such calendar year is not an adjustment year, the most recent adjustment year).
(B)
Section 7702 valuation interest rate
(C)
Section 7702 applicable Federal interest rate
(E)
Transition rule
Notwithstanding subparagraph (A), the insurance interest rate shall be 2 percent in the case of any contract which is issued during the period that—
(i)
begins on January 1, 2021, and
(ii)
ends immediately before the beginning of the first adjustment year that beings
1
So in original. Probably should be “begins”.
after
December 31, 2021.
(g)
Treatment of contracts which do not meet subsection (a) test
(1)
Income inclusion
(B)
Income on the contract
For purposes of this paragraph, the term “income on the contract” means, with respect to any taxable year of the policyholder, the excess of—
(i)
the sum of—
(I)
the increase in the net surrender value of the contract during the taxable year, and
(II)
the cost of life insurance protection provided under the contract during the taxable year, over
(ii)
the premiums paid (as defined in subsection (f)(1)) under the contract during the taxable year.
(C)
Contracts which cease to meet definition
(D)
Cost of life insurance protection
For purposes of this paragraph, the cost of life insurance protection provided under the contract shall be the lesser of—
(i)
the cost of individual insurance on the life of the insured as determined on the basis of uniform premiums (computed on the basis of 5-year age brackets) prescribed by the Secretary by regulations, or
(ii)
the mortality charge (if any) stated in the contract.
(2)
Treatment of amount paid on death of insured
(3)
Contract continues to be treated as insurance contract
(h)
Endowment contracts receive same treatment
(2)
Definition of endowment contract
(i)
Transitional rule for certain 20-pay contracts
(2)
Qualified 20-pay contract
For purposes of paragraph (1), the term “qualified 20-pay contract” means any contract which—
(A)
requires at least 20 nondecreasing annual premium payments, and
(B)
is issued pursuant to an existing plan of insurance.
(3)
Existing plan of insurance
(j)
Certain church self-funded death benefit plans treated as life insurance
(2)
Description
For purposes of this subsection, a plan or arrangement is described in this paragraph if—
(A)
such plan or arrangement provides for the payment of benefits by reason of the death of the individuals covered under such plan or arrangement, and
(B)
such plan or arrangement is provided by a church for the benefit of its employees and their beneficiaries, directly or through an organization described in section 414(e)(3)(A) or an organization described in section 414(e)(3)(B)(ii).
(3)
Definitions
For purposes of this subsection—
(Added [Pub. L. 98–369, div. A, title II, § 221(a)], July 18, 1984, [98 Stat. 767]; amended [Pub. L. 99–514, title XVIII, § 1825(a)]–(c), Oct. 22, 1986, [100 Stat. 2846–2848]; [Pub. L. 100–647, title V, § 5011(a)], (b), title VI, § 6078(a), Nov. 10, 1988, [102 Stat. 3660], 3661, 3709; [Pub. L. 115–97, title I, § 13517(a)(4)], Dec. 22, 2017, [131 Stat. 2146]; [Pub. L. 116–260, div. EE, title II, § 205(a)]–(d), Dec. 27, 2020, [134 Stat. 3058].)