§ 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—
(b)
Cash value accumulation test for subsection (a)(1)
(1)
In general
A contract meets the cash value accumulation test of this subsection if, by the terms of the contract, the cash surrender value of such contract may not at any time exceed the net single premium which would have to be paid at such time to fund future benefits under the contract.
(2)
Rules for applying paragraph (1)
Determinations under paragraph (1) shall be made—
(A)
on the basis of interest at the greater of an annual effective rate of 4 percent or the rate or rates guaranteed on issuance of the contract,
(c)
Guideline premium requirements
For purposes of this section—
(1)
In general
A contract meets the guideline premium requirements of this subsection if the sum of the premiums paid under such contract does not at any time exceed the guideline premium limitation as of such time.
(2)
Guideline premium limitation
The term “guideline premium limitation” means, as of any date, the greater of—
(3)
Guideline single premium
(A)
In general
The term “guideline single premium” means the premium at issue with respect to future benefits under the contract.
(B)
Basis on which determination is made
The determination under subparagraph (A) shall be based on—
(i)
reasonable mortality charges which meet the requirements (if any) prescribed in regulations and which (except as provided in regulations) do not exceed the mortality charges specified in the prevailing commissioners’ standard tables (as defined in section 807(d)(5)) as of the time the contract is issued,
(C)
When determination made
Except as provided in subsection (f)(7), the determination under subparagraph (A) shall be made as of the time the contract is issued.
(4)
Guideline level premium
The term “guideline level premium” means the level annual amount, payable over a period not ending before the insured attains age 95, computed on the same basis as the guideline single premium, except that paragraph (3)(B)(iii) shall be applied by substituting “4 percent” for “6 percent”.
(d)
Cash value corridor for purposes of subsection (a)(2)(B)
For purposes of this section—
(1)
In general
A contract falls within the cash value corridor of this subsection if the death benefit under the contract at any time is not less than the applicable percentage of the cash surrender value.
(2)
Applicable percentage
| In the case of an insured with an attained age as of the beginning of the contract year of: | More than: | But not more than: | The applicable percentage shall decrease by a ratable portion for each full year: | From: | To: |
|---|---|---|---|---|---|
| 0 | 40 | 250 | 250 | ||
| 40 | 45 | 250 | 215 | ||
| 45 | 50 | 215 | 185 | ||
| 50 | 55 | 185 | 150 | ||
| 55 | 60 | 150 | 130 | ||
| 60 | 65 | 130 | 120 | ||
| 65 | 70 | 120 | 115 | ||
| 70 | 75 | 115 | 105 | ||
| 75 | 90 | 105 | 105 | ||
| 90 | 95 | 105 | 100. |
(e)
Computational rules
(1)
In general
For purposes of this section (other than subsection (d))—
(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,
(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—
(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
(A)
In general
The term “premiums paid” means the premiums paid under the contract less amounts (other than amounts includible in gross income) to which section
72
(e) applies and less any excess premiums with respect to which there is a distribution described in subparagraph (B) or (E) of paragraph (7) and any other amounts received with respect to the contract which are specified in regulations.
(B)
Treatment of certain premiums returned to policyholder
If, in order to comply with the requirements of subsection (a)(2)(A), any portion of any premium paid during any contract year is returned by the insurance company (with interest) within 60 days after the end of a contract year, the amount so returned (excluding interest) shall be deemed to reduce the sum of the premiums paid under the contract during such year.
(2)
Cash values
(3)
Death benefit
The term “death benefit” means the amount payable by reason of the death of the insured (determined without regard to any qualified additional benefits).
(5)
Qualified additional benefits
(6)
Premium payments not disqualifying contract
The payment of a premium which would result in the sum of the premiums paid exceeding the guideline premium limitation shall be disregarded for purposes of subsection (a)(2) if the amount of such premium does not exceed the amount necessary to prevent the termination of the contract on or before the end of the contract year (but only if the contract will have no cash surrender value at the end of such extension period).
(7)
Adjustments
(A)
In general
If there is a change in the benefits under (or in other terms of) the contract which was not reflected in any previous determination or adjustment made under this section, there shall be proper adjustments in future determinations made under this section.
(B)
Rule for certain changes during first 15 years
If—
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—
(ii)
in the case of a contract to which subsection (a)(2) applies, the greater of—
(D)
Recapture ceiling where change occurs after 5th year and before 16th year
If the change referred to in subparagraph (B) occurs after the 5-year period referred to under subparagraph (C), the recapture ceiling is 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 and whether or not subsection (d) applies to the contract).
(E)
Treatment of certain distributions made in anticipation of benefit reductions
Under regulations prescribed by the Secretary, subparagraph (B) shall apply also to any distribution made in anticipation of a reduction in benefits under the contract. For purposes of the preceding sentence, appropriate adjustments shall be made in the provisions of subparagraphs (C) and (D); and any distribution which reduces the cash surrender value of a contract and which is made within 2 years before a reduction in benefits under the contract shall be treated as made in anticipation of such reduction.
(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
the Secretary may waive the failure to satisfy such requirements.
(9)
Special rule for variable life insurance contracts
In the case of any contract which is a variable contract (as defined in section
817), the determination of whether such contract meets the requirements of subsection (a) shall be made whenever the death benefits under such contract change but not less frequently than once during each 12-month period.
(g)
Treatment of contracts which do not meet subsection (a) test
(1)
Income inclusion
(A)
In general
If at any time any contract which is a life insurance contract under the applicable law does not meet the definition of life insurance contract under subsection (a), the income on the contract for any taxable year of the policyholder shall be treated as ordinary income received or accrued by the policyholder during such year.
(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—
(C)
Contracts which cease to meet definition
If, during any taxable year of the policyholder, a contract which is a life insurance contract under the applicable law ceases to meet the definition of life insurance contract under subsection (a), the income on the contract for all prior taxable years shall be treated as received or accrued during the taxable year in which such cessation occurs.
(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—
(2)
Treatment of amount paid on death of insured
If any contract which is a life insurance contract under the applicable law does not meet the definition of life insurance contract under subsection (a), the excess of the amount paid by the reason of the death of the insured over the net surrender value of the contract shall be deemed to be paid under a life insurance contract for purposes of section
101 and subtitle B.
(3)
Contract continues to be treated as insurance contract
If any contract which is a life insurance contract under the applicable law does not meet the definition of life insurance contract under subsection (a), such contract shall, notwithstanding such failure, be treated as an insurance contract for purposes of this title.
(h)
Endowment contracts receive same treatment
(i)
Transitional rule for certain 20-pay contracts
(1)
In general
In the case of a qualified 20-pay contract, this section shall be applied by substituting “3 percent” for “4 percent” in subsection (b)(2).
(2)
Qualified 20-pay contract
For purposes of paragraph (1), the term “qualified 20-pay contract” means any contract which—
(3)
Existing plan of insurance
For purposes of this subsection, the term “existing plan of insurance” means, with respect to any contract, any plan of insurance which was filed by the company issuing such contract in 1 or more States before September 28, 1983, and is on file in the appropriate State for such contract.
(j)
Certain church self-funded death benefit plans treated as life insurance
(1)
In general
In determining whether any plan or arrangement described in paragraph (2) is a life insurance contract, the requirement of subsection (a) that the contract be a life insurance contract under applicable law shall not apply.
(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).
(k)
Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.