1.72-7—Adjustment in investment where a contract contains a refund feature.
(a) Definition of a contract containing a refund feature.
A contract to which section 72 applies, contains a refund feature if:
(1)
The total amount receivable as an annuity under such contract depends, in whole or in part, on the continuing life of one or more persons,
(2)
The contract provides for payments to be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a specified amount or a stated number of payments has not been paid to the annuitant or annuitants prior to death, and
(3)
Such payments are in the nature of a refund of the consideration paid. See paragraph (c)(1) of § 1.72-11.
(b) Adjustment of investment for the refund feature in the case of a single life annuity.
Where a single life annuity contract to which section 72 applies contains a refund feature and the special rule of paragraph (d) of this section does not apply, the investment in the contract shall be adjusted in the following manner:
(1)
Determine the number of years necessary for the guaranteed amount to be fully paid by dividing the maximum amount guaranteed as of the annuity starting date by the amount to be received annually under the contract to the extent such amount reduces the guaranteed amount. The number of years should be stated in terms of the nearest whole year, considering for this purpose a fraction of one-half or more as an additional whole year.
(2)
Consult Table III or VII (whichever is applicable) of § 1.72-9 for the appropriate percentage under the whole number of years found in subparagraph (1) of this paragraph and the age (as of the annuity starting date) and, if applicable, sex of the annuitant.
(3)
Multiply the percentage found in subparagraph (2) of this paragraph by whichever of the following is the smaller: (i) The investment in the contract found in accordance with § 1.72-6 or (ii) the total amount guaranteed as of the annuity starting date.
(4)
Subtract the amount found in subparagraph (3) of this paragraph from the investment in the contract found in accordance with § 1.72-6.
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Cost of the annuity contract (investment in the contract, unadjusted) | $21,053 |
Amount to be received annually | $1,200 |
Number of years for which payment guaranteed ($21,053 divided by $1,200) | 17.5 |
Rounded to nearest whole number of years | 18 |
Percentage located in Table III for age 65 (age of the annuitant as of the annuity starting date) and 18 (the number of whole years) (percent) | 30 |
Subtract value of the refund feature to the nearest dollar (30 percent of $21,053) | $6,316 |
Investment in the contract adjusted for the present value of the refund feature without discount for interest | $14,737 |
Code of Federal Regulations
Cost of the annuity contract (investment in the contract, unadjusted) | $21,053 |
Amount to be received annually | $1,200 |
Number of years for which payment guaranteed ($21,053÷$1,200) | 17.5 |
Rounded to nearest whole number of years | 18 |
Percentage in Table VII for age 65 and 18 years (percent) | 15 |
Subtract value of the refund feature to the nearest dollar (15 percent of $21,053) | $3,158 |
Investment in the contract adjusted for the present value of the refund feature without discount for interest | $17,895 |
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Pre-July 1986 investment in the contract (unadjusted) | $10,000 |
Pre-July 1986 portion of the amount to be received annually ($10,000/$21,053×$1,200) | $570.00 |
Number of years for which payment guaranteed ($10,000÷$570) | 17.50 |
Rounded to nearest whole number of years | 18 |
Percentage in Table III for age 65 and 18 years (percent) | 30 |
Subtract value of the refund feature to the nearest dollar (30 percent of $10,000) | $3,000 |
Pre-July 1986 investment in the contract adjusted for the present value of the refund feature without discount for interest | $7,000 |
Post-June 1986 investment in the contract (unadjusted) | $11,053 |
Post-June 1986 portion of the amount to be received annually ($11,053/$21,053×$1,200) | $630 |
Number of years for which payment guaranteed ($11,053÷$630) | 17.54 |
Rounded to nearest whole number of years | 18 |
Percentage in Table VII for age 65 and 18 years (percent) | 15 |
Subtract value of the refund feature to the nearest dollar (15 percent of $11,053) | $1,658 |
Post-June 1986 investment in the contract adjusted for the present value of the refund feature without discount for interest | $9,395 |
Code of Federal Regulations
(c) Adjustment of investment for the refund feature in the case of a joint and survivor annuity.
(1)
Except as provided in paragraph (c)(2) of this section, if a joint and survivor annuity contract described in paragraph (b) (1), (2) or (6) of § 1.72-5 contains a refund feature and the special rule of paragraph (d) of this section does not apply, the investment in the contract shall be adjusted in the following manner:
In which:
V = The percentage, rounded to the nearest whole percent,
x = The age at the nearest birthday of the primary annuitant,
y = The age at the nearest birthday of the survivor annuitant,
N = The guaranteed amount divided by the annual annuity payable to the primary annuitant, rounded to the nearest integer,
P = The annual annuity continued to the survivor annuitant divided by the annual annuity payable to the primary annuitant,
(ii)
Multiply the percentage found in paragraph (c)(1)(i) of this section by the lesser of (A) the investment in the contract found in accordance with § 1.72-6, or (B) the total amount guaranteed as of the annuity starting date.
(iii)
Subtract the amount found in paragraph (c)(1)(ii) of this section from the investment in the contract found in accordance with § 1.72-6.
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x | lx |
---|---|
5 | 1000000. |
6 | 999729. |
7 | 999493. |
8 | 999284. |
9 | 999069. |
10 | 998849. |
11 | 998620. |
12 | 998382. |
13 | 998135. |
14 | 997876. |
15 | 997606. |
16 | 997322. |
17 | 997025. |
18 | 996714. |
19 | 996387. |
20 | 996044. |
21 | 995684. |
22 | 995304. |
23 | 994905. |
24 | 994484. |
25 | 994041. |
26 | 993573. |
27 | 993080. |
28 | 992563. |
29 | 992024. |
30 | 991461. |
31 | 990876. |
32 | 990269. |
33 | 989638. |
34 | 988984. |
35 | 988303. |
36 | 987593. |
37 | 986846. |
38 | 986055. |
39 | 985210. |
40 | 984298. |
41 | 983310. |
42 | 982230. |
43 | 981046. |
44 | 979742. |
45 | 978302. |
46 | 976709. |
47 | 974945. |
48 | 972992. |
49 | 970832. |
50 | 968447. |
51 | 966000. |
52 | 963313. |
53 | 960375. |
54 | 957175. |
55 | 953705. |
56 | 949954. |
57 | 945912. |
58 | 941568. |
59 | 936908. |
60 | 931903. |
61 | 926451. |
62 | 920540. |
63 | 914090. |
64 | 907011. |
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170
|
|
65 | 899221. |
66 | 890428. |
67 | 880797. |
68 | 870298. |
69 | 858904. |
70 | 846565. |
71 | 832316. |
72 | 816861. |
73 | 800078. |
74 | 781837. |
75 | 762012. |
76 | 740743. |
77 | 717689. |
78 | 692780. |
79 | 665977. |
80 | 637260. |
81 | 607339. |
82 | 575531. |
83 | 541919. |
84 | 506647. |
85 | 469931. |
86 | 432459. |
87 | 394138. |
88 | 355393. |
89 | 316712. |
90 | 278663. |
91 | 242020. |
92 | 207150. |
93 | 174602. |
94 | 144828. |
95 | 118151. |
96 | 94871.7 |
97 | 74863.6 |
98 | 58042.2 |
99 | 44176.1 |
100 | 32956.4 |
101 | 24044.8 |
102 | 17104.1 |
103 | 11815.5 |
104 | 7886.75 |
105 | 5054.94 |
106 | 3086.95 |
107 | 1778.82 |
108 | 955.465 |
109 | 470.955 |
110 | 208.668 |
111 | 80.7899 |
112 | 26.2340 |
113 | 6.69620 |
114 | 1.19385 |
115 | .111460 |
(2)
If the multiples in Tables I through IV of § 1.72-9 are used to determine any portion of the expected return under a contract described in paragraph (c)(1) of this section, only the post-June 1986 investment in the contract (if any) shall be adjusted in the manner described in paragraph (c)(1) of this section, and the pre-July 1986 investment in the contract shall, in the case of a contract described in paragraph (b) (1) or (6) of § 1.72-5, be adjusted in the following manner:
(i)
Determine the number of years necessary for the guaranteed amount to be fully paid by dividing the maximum amount guaranteed as of the annuity starting date by the amount to be received annually under the contract. The number of years should be stated in terms of the nearest whole year, considering for this purpose a fraction of one-half or more as an additional whole year.
(ii)
Consult Table III of § 1.72-9 for the appropriate percentages under the whole number of years found in subdivision (i) of this subparagraph and the age (as of the annuity starting date) and sex of each annuitant. If the annuitants are not of the same sex, substitute for the female annuitant a male annuitant 5 years younger, or for the male annuitant a female annuitant 5 years older, so that Table III will be entered in both cases with the ages of annuitants of the same sex.
(iii)
Find the sum of the two percentages found in accordance with subdivision (ii) of this subparagraph.
(iv)
To the age of the elder of the two annuitants (as determined under subdivision (ii) of this subparagraph), add the number of years (indicated in the table below) opposite the number of years by which such annuitants' ages differ:
Number of years difference in age (2 male annuitants or 2 female annuitants) | Addition to older age in years |
---|---|
0 to 1, inclusive | 9 |
2 to 3, inclusive | 8 |
4 to 5, inclusive | 7 |
6 to 8, inclusive | 6 |
9 to 11, inclusive | 5 |
12 to 15, inclusive | 4 |
16 to 20, inclusive | 3 |
21 to 27, inclusive | 2 |
28 to 42, inclusive | 1 |
Over 42 | 0 |
(v)
Consult Table III for the appropriate percentage under the whole number of years found in subdivision (i) of this subparagraph and the age and sex of the elder annuitant as adjusted under subdivision (iv) of this subparagraph.
(vi)
Subtract the percentage obtained in subdivision (v) of this subparagraph from the sum of the percentages found under subdivision (iii) of this subparagraph. If the result is less than one, subdivisions (vii) and (viii) of this subparagraph shall be disregarded and no adjustment made to the investment in the contract.
(vii)
Multiply the percentage found in subdivision (vi) of this subparagraph by whichever of the following is the smaller: (A) the investment in the contract found in accordance with § 1.72-6 or (B) the total amount guaranteed as of the annuity starting date.
(viii)
Subtract the amount found in subdivision (vii) of this subparagraph from the investment in the contract found in accordance with § 1.72-6.
Code of Federal Regulations
Cost of the annuity contract (investment in the contract unadjusted) | $33,050 |
Guaranteed amount ($1,200×10) | $12,000 |
Percentage in Table III for male, age 70 (or female, age 75) for duration of the guarantee (10) | 21 |
Percentage in Table III for female, age 40 (or male, age 35) for duration of the guarantee (10) | 2 |
Sum of percentages obtained | 23 |
Difference in years of age between two males, aged 70 and 35 (or 2 females, aged 75 and 40) | 35 |
Addition, in years, to older age | 1 |
Percentage in Table III for male one year older than A | 22 |
Difference between percentages obtained (23 percent less 22 percent) | 1 |
Value of the refund feature to the nearest dollar (1 percent of $12,000) | $120 |
Investment in the contract adjusted for present value of the refund feature | $32,930 |
Code of Federal Regulations
(4)
If an annuity described in paragraph (b) of § 1.72-5 contains a refund feature and the manner of determining the adjustment to the investment in the contract (or to any part of such investment) is not prescribed or requires use of the formula in paragraph (c)(1)(i) of this section, the Commissioner will determine the amount of the adjustment upon request. The request must contain the date of birth of each annuitant, the guaranteed amount, the annual annuity payable to each annuitant, and the annuity starting date. Send the request to the Commissioner of Internal Revenue, Attention: OP:E:EP:GA, Washington, D.C. 20224.
(d) Adjustment of investment in the contract where paragraph (b)(3) of
(1)
If paragraph (b)(3) of § 1.72-2 applies to payments to be made under a contract and this section also applies because of the provision for a refund feature, an adjustment shall be made to the investment in the contract in accordance with this paragraph before making the computations required by paragraph (d)(3) of § 1.72-4 and paragraph (d)(7) of § 1.72-5. In the case of the guarantee of a specified amount, the adjustment shall be made by applying the appropriate multiple from Table III or VII (whichever is applicable), as otherwise determined under this section, to the investment in the contract or the guranteed amount, whichever is the lesser. The guarantee period shall be found by dividing the amount guaranteed by the amount determined by placing the payments received during the first taxable year (to guaranteed amount) on an annual basis. Thus, if monthly payments are first received by a taxpayer on a calendar year basis in August, his total payments (to the extent that they reduce the guaranteed amount) for the taxable year would be divided by 5 and multiplied by 12. The guaranteed amount would then be divided by the result of this computation to obtain the guarantee period. If the contract merely guarantees that proceeds from a unit or units of a fund shall be paid for a fixed number of years or the life (or lives) of an annuitant (or annuitants), whichever is the longer, the fixed number of years is the guarantee period. The appropriate percentage in Table III or VII shall be applied to whichever of the following is the smaller: (i) the investment in the contract; or (ii) the product of the payments received in the first taxable year, placed on an annual basis, multiplied by the number of years for which payment of the proceeds of a unit or units is guaranteed.
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(e) Adjustment of the investment in the contract where more than one annuity element is provided for a single consideration.
In the case of contracts to which paragraph (b) of § 1.72-6 applies for the purpose of allocating the investment in the contract to two or more annuity elements which are provided for a single consideration, if one or more of such elements involves a refund feature, the portion of the investment in the contract properly allocable to each such element shall be adjusted for the refund feature before aggregating all the investments in order to obtain the exclusion ratio which is to apply to the contract as a whole.
Code of Federal Regulations
A's expected return (A's payments per year of $4,146 multiplied by his life expectancy from Table 1 of 12.1) | $50,166.60 |
B's expected return (B's payments per year of $2,820 multiplied by his life expectancy from Table 1 of 18.2) | $51,324.00 |
Sum of expected returns to be used in determining exclusion ratio | $101,490.60 |
Percentage of total expected return attributable to A's expectancy of life ($50,166.60÷$101,490.60) | 49.4 |
Percentage of total expected return attributable to B's expectancy of life ($51,324÷$101,490.60) | 50.6 |
Portion of investment in the contract allocable to A's annuity (49.4 percent of $86,000) | $42,484.00 |
Portion of investment in the contract allocable to B's annuity (50.6 percent of $86,000) | $43,516.00 |
Value of the refund feature with respect to A's annuity (percentage from Table III for male, age 70, and duration 10, or 21 percent, multiplied by lesser of guaranteed amount and allocable portion of investment in the contract, $41,460) | $8,707.00 |
A's allocable portion of the investment in the contract adjusted for refund feature ($42,484 less $8,707.00) | $33,777.00 |
Value of the refund feature with respect to B's annuity (percentage from Table III for male, age 60, and duration 20, or 25 percent, multiplied by lesser of guaranteed amount and allocable portion of investment in the contract, $43,516) | $10,879.00 |
B's allocable portion of the investment in the contract adjusted for refund feature ($43,516 less $10,879.00) | $32,637.00 |
Sum of A's and B's allocable portions of the investment in the contract after adjustment for the refund feature | $66,414.00 |
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|
Exclusion ratio for the contract as a whole (total adjusted investment in the contract, $66,414, divided by the total expected return from above, $101,490.60) (percent) | 65.4 |
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A's expected return (A's payments per year of $4,146 multiplied by his life expectancy from Table V of 16.0) | $66,336.00 |
B's expected return (B's payments per year of $2,820 multiplied by his life expectancy from Table V of 24.2) | $68,244.00 |
Sum of expected returns to be used in determining exclusion ratio | $134,580.00 |
Percentage of total expected return attributable to A's expectancy of life ($66,336.00÷$134,580.00) | 49.3 |
Percentage of total expected return attributable to B's expectancy of life ($68,244.00÷$134,580.00) | 50.7 |
Portion of investment in the contract allocable to A's annuity (49.3 percent of $86,000) | $42,398.00 |
Portion of investment in the contract allocable to B's annuity (50.7 percent of $86,000) | $43,602.00 |
Value of the refund feature with respect to A's annuity (percentage from Table VII for age 70 and duration 10, or 11 percent, multiplied by lesser of the guaranteed amount and allocable portion of investment in the contract, $41,460) | $4,560.60 |
A's allocable portion of the investment in the contract adjusted for refund feature ($42,398 less $4,560.60) | $37,837.40 |
Value of the refund feature with respect to B's annuity (percentage from Table VII for age 60 and duration 20, or 11 percent, multiplied by lesser of guaranteed amount and allocable portion of investment in the contract, $43,602) | $4,796.22 |
B's allocable portion of the investment in the contract adjusted for refund feature ($43,602 less $4,796.22) | $38,805.78 |
Sum of A's and B's allocable portions of the investment in the contract after adjustment for the refund feature | $76,643.18 |
Exclusion ratio for the contract as a whole (total adjusted investment in the contract, $76,643.18, divided by the total expected return from above, $134,580.00) (percent) | 56.9 |
(f) Adjustment of investment in the contract with respect to contracts subject to
In the case of a contract to which § 1.72-6(d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, this section is applied in the manner prescribed in § 1.72-6(d) and, in particular, § 1.72-6(d)(5)(vi).