§ 807. Rules for certain reserves
(a)
Decrease treated as gross income
If for any taxable year—
(2)
(B)
the amount of the policyholders’ share of tax-exempt interest and the amount of the policyholder’s share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section
264
(f) applies,
(b)
Increase treated as deduction
If for any taxable year—
(1)
(B)
the amount of the policyholders’ share of tax-exempt interest and the amount of the policyholder’s share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section
264
(f) applies, exceeds
(c)
Items taken into account
The items referred to in subsections (a) and (b) are as follows:
(3)
The amounts (discounted at the appropriate rate of interest) necessary to satisfy the obligations under insurance and annuity contracts, but only if such obligations do not involve (at the time with respect to which the computation is made under this paragraph) life, accident, or health contingencies.
(4)
Dividend accumulations, and other amounts, held at interest in connection with insurance and annuity contracts.
(6)
Reasonable special contingency reserves under contracts of group term life insurance or group accident and health insurance which are established and maintained for the provision of insurance on retired lives, for premium stabilization, or for a combination thereof.
For purposes of paragraph (3), the appropriate rate of interest for any obligation is whichever of the following rates is the highest as of the time such obligation first did not involve life, accident, or health contingencies: the applicable Federal interest rate under subsection (d)(2)(B)(i), the prevailing State assumed interest rate under subsection (d)(2)(B)(ii), or the rate of interest assumed by the company in determining the guaranteed benefit. In no case shall the amount determined under paragraph (3) for any contract be less than the net surrender value of such contract. For purposes of paragraph (2) and section
805
(a)(1), the amount of the unpaid losses (other than losses on life insurance contracts) shall be the amount of the discounted unpaid losses as defined in section
846.
(d)
Method of computing reserves for purposes of determining income
(1)
In general
For purposes of this part (other than section
816), the amount of the life insurance reserves for any contract shall be the greater of—
In no event shall the reserve determined under the preceding sentence for any contract as of any time exceed the amount which would be taken into account with respect to such contract as of such time in determining statutory reserves (as defined in paragraph (6)).
(2)
Amount of reserve
The amount of the reserve determined under this paragraph with respect to any contract shall be determined by using—
(3)
Tax reserve method
For purposes of this subsection—
(A)
In general
The term “tax reserve method” means—
(iii)
Noncancellable accident and health insurance contracts
In the case of any noncancellable accident and health insurance contract (other than a qualified long-term care insurance contract, as defined in section
7702B
(b)), a 2-year full preliminary term method.
(iv)
Other contracts
In the case of any contract not described in clause (i), (ii), or (iii)—
(I)
the reserve method prescribed by the National Association of Insurance Commissioners which covers such contract (as of the date of issuance), or
(II)
if no reserve method has been prescribed by the National Association of Insurance Commissioners which covers such contract, a reserve method which is consistent with the reserve method required under clause (i), (ii), or (iii) or under subclause (I) of this clause as of the date of the issuance of such contract (whichever is most appropriate).
(B)
Definition of CRVM and CARVM
For purposes of this paragraph—
(C)
No additional reserve deduction allowed for deficiency reserves
Nothing in any reserve method described under this paragraph shall permit any increase in the reserve because the net premium (computed on the basis of assumptions required under this subsection) exceeds the actual premiums or other consideration charged for the benefit.
(4)
Applicable Federal interest rate; prevailing State assumed interest rate
For purposes of this subsection—
(A)
Applicable Federal interest rate
(i)
In general
Except as provided in clause (ii), the term “applicable Federal interest rate” means the annual rate determined by the Secretary under section
846
(c)(2) for the calendar year in which the contract was issued.
(ii)
Election to recompute Federal interest rate every 5 years
(I)
In general
In computing the amount of the reserve with respect to any contract to which an election under this clause applies for periods during any recomputation period, the applicable Federal interest rate shall be the annual rate determined by the Secretary under section
846
(c)(2) for the 1st year of such period. No change in the applicable Federal interest rate shall be made under the preceding sentence unless such change would equal or exceed 1/2 of 1 percentage point.
(II)
Recomputation period
For purposes of subclause (I), the term “recomputation period” means, with respect to any contract, the 5 calendar year period beginning with the 5th calendar year beginning after the calendar year in which the contract was issued (and each subsequent 5 calendar year period).
(B)
Prevailing State assumed interest rate
(i)
In general
The term “prevailing State assumed interest rate” means, with respect to any contract, the highest assumed interest rate permitted to be used in computing life insurance reserves for insurance contracts or annuity contracts (as the case may be) under the insurance laws of at least 26 States. For purposes of the preceding sentence, the effect of nonforfeiture laws of a State on interest rates for reserves shall not be taken into account.
(5)
Prevailing commissioners’ standard tables
For purposes of this subsection—
(A)
In general
The term “prevailing commissioners’ standard tables” means, with respect to any contract, the most recent commissioners’ standard tables prescribed by the National Association of Insurance Commissioners which are permitted to be used in computing reserves for that type of contract under the insurance laws of at least 26 States when the contract was issued.
(B)
Insurer may use old tables for 3 years when tables change
If the prevailing commissioners’ standard tables as of the beginning of any calendar year (hereinafter in this subparagraph referred to as the “year of change”) is different from the prevailing commissioners’ standard tables as of the beginning of the preceding calendar year, the issuer may use the prevailing commissioners’ standard tables as of the beginning of the preceding calendar year with respect to any contract issued after the change and before the close of the 3-year period beginning on the first day of the year of change.
(C)
Special rule for contracts for which there are no commissioners’ standard tables
If there are no commissioners’ standard tables applicable to any contract when it is issued, the mortality and morbidity tables used for purposes of paragraph (2)(C) shall be determined under regulations prescribed by the Secretary. When the Secretary by regulation changes the table applicable to a type of contract, the new table shall be treated (for purposes of subparagraph (B) and for purposes of determining the issue dates of contracts for which it shall be used) as if it were a new prevailing commissioner’s standard table adopted by the twenty-sixth State as of a date (no earlier than the date the regulation is issued) specified by the Secretary.
(D)
Special rule for contracts issued before 1948
If—
the mortality and morbidity tables used in computing statutory reserves for such contracts shall be used for purposes of paragraph (2)(C).
(E)
Special rule where more than 1 table or option applicable
If, with respect to any category of risks, there are 2 or more tables (or options under 1 or more tables) which meet the requirements of subparagraph (A) (or, where applicable, subparagraph (B) or (C)), the table (and option thereunder) which generally yields the lowest reserves shall be used for purposes of paragraph (2)(C).
(6)
Statutory reserves
The term “statutory reserves” means the aggregate amount set forth in the annual statement with respect to items described in section
807
(c). Such term shall not include any reserve attributable to a deferred and uncollected premium if the establishment of such reserve is not permitted under section
811
(c).
(e)
Special rules for computing reserves
(1)
Net surrender value
For purposes of this section—
(B)
Special rule for pension plan contracts
In the case of a pension plan contract, the balance in the policyholder’s fund shall be treated as the net surrender value of such contract. For purposes of the preceding sentence, such balance shall be determined with regard to any penalty or forfeiture which would be imposed on surrender but without regard to any market value adjustment.
(2)
Issuance date in case of group contracts
For purposes of this section, in the case of a group contract, the date on which such contract is issued shall be the date as of which the master plan is issued (or, with respect to a benefit guaranteed to a participant after such date, the date as of which such benefit is guaranteed).
(3)
Supplemental benefits
(A)
Qualified supplemental benefits treated separately
For purposes of this part, the amount of the life insurance reserve for any qualified supplemental benefit—
(B)
Supplemental benefits which are not qualified supplemental benefits
In the case of any supplemental benefit described in subparagraph (D) which is not a qualified supplemental benefit, the amount of the reserve determined under paragraph (2) of subsection (d) shall, except to the extent otherwise provided in regulations, be the reserve taken into account for purposes of the annual statement approved by the National Association of Insurance Commissioners.
(C)
Qualified supplemental benefit
For purposes of this paragraph, the term “qualified supplemental benefit” means any supplemental benefit described in subparagraph (D) if—
(4)
Certain contracts issued by foreign branches of domestic life insurance companies
(A)
In general
In the case of any qualified foreign contract, the amount of the reserve shall be not less than the minimum reserve required by the laws, regulations, or administrative guidance of the regulatory authority of the foreign country referred to in subparagraph (B) (but not to exceed the net level reserves for such contract).
(B)
Qualified foreign contract
For purposes of subparagraph (A), the term “qualified foreign contract” means any contract issued by a foreign life insurance branch (which has its principal place of business in a foreign country) of a domestic life insurance company if—
(5)
Treatment of substandard risks
(A)
Separate computation
Except to the extent provided in regulations, the amount of the life insurance reserve for any qualified substandard risk shall be computed separately under subsection (d)(1) from any other reserve under the contract.
(B)
Qualified substandard risk
For purposes of subparagraph (A), the term “qualified substandard risk” means any substandard risk if—
(6)
Special rules for contracts issued before January 1, 1989, under existing plans of insurance, with term insurance or annuity benefits
For purposes of this part—
(A)
In general
In the case of a life insurance contract issued before January 1, 1989, under an existing plan of insurance, the life insurance reserve for any benefit to which this paragraph applies shall be computed separately under subsection (d)(1) from any other reserve under the contract.
(B)
Benefits to which this paragraph applies
This paragraph applies to any term insurance or annuity benefit with respect to which the requirements of clauses (i) and (ii) of paragraph (3)(C) are met.
(C)
Existing plan of insurance
For purposes of this paragraph, the term “existing plan of insurance” means, with respect to any contract, any plan of insurance which was filed by the company using such contract in one or more States before January 1, 1984, and is on file in the appropriate State for such contract.
(7)
Special rules for treatment of certain nonlife reserves
(A)
In general
The amount taken into account for purposes of subsections (a) and (b) as—
shall be 80 percent of the amount which (without regard to this subparagraph) would have been taken into account as such opening or closing balance, as the case may be.
(B)
Transitional rule
(i)
In general
In the case of any taxable year beginning on or after September 30, 1990, and before September 30, 1996, there shall be included in the gross income of any life insurance company an amount equal to 31/3 percent of such company’s closing balance of the items referred to in subparagraph (C) for its most recent taxable year beginning before September 30, 1990.
(ii)
Termination as life insurance company
Except as provided in section
381
(c)(22), if, for any taxable year beginning on or before September 30, 1996, the taxpayer ceases to be a life insurance company, the aggregate inclusions which would have been made under clause (i) for such taxable year and subsequent taxable years but for such cessation shall be taken into account for the taxable year preceding such cessation year.
(f)
Adjustment for change in computing reserves
(1)
10-year spread
(A)
In general
For purposes of this part, if the basis for determining any item referred to in subsection (c) as of the close of any taxable year differs from the basis for such determination as of the close of the preceding taxable year, then so much of the difference between—
as is attributable to contracts issued before the taxable year shall be taken into account under the method provided in subparagraph (B).
(B)
Method
The method provided in this subparagraph is as follows: