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).
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.
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,
(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.
For purposes of this section—
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.
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.
The term "guideline single premium" means the premium at issue with respect to future benefits under the contract.
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,
(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 an annual effective rate of 6 percent or the rate or rates guaranteed on issuance of the contract.
Except as provided in subsection (f)(7), the determination under subparagraph (A) shall be made as of the time the contract is issued.
If any charge is not specified in the contract, the amount taken into account under subparagraph (B)(ii) for such charge shall be zero.
If any company does not have adequate experience for purposes of the determination under subparagraph (B)(ii), to the extent provided in regulations, such determination shall be made on the basis of the industry-wide experience.
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".
For purposes of this section—
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.
| In the case of an insured with an attained age as of the beginning of the contract year of: | The applicable percentage shall decrease by a ratable portion for each full year: | ||
|---|---|---|---|
| More than: | But not more than: | 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. |
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.
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.
For purposes of this section—
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.
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.
Notwithstanding the provisions of section 72(e), the amount of any interest returned as provided in subparagraph (B) shall be includible in the gross income of the recipient.
The cash surrender value of any contract shall be its cash value determined without regard to any surrender charge, policy loan, or reasonable termination dividends.
The net surrender value of any contract shall be determined with regard to surrender charges but without regard to any policy loan.
The term "death benefit" means the amount payable by reason of the death of the insured (determined without regard to any qualified additional benefits).
The term "future benefits" means death benefits and endowment benefits.
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.
For purposes of this section, qualified additional benefits shall not be treated as future benefits under the contract, but the charges for such benefits shall be treated as future 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.
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).
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.
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).
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).
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
References in subsections (a) and (g) to a life insurance contract shall be treated as including references to a contract which is an endowment contract under the applicable law.
For purposes of this title (other than paragraph (1)), the term "endowment contract" means a contract which is an endowment contract under the applicable law and which meets the requirements of subsection (a).
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).
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.
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.
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.
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).
For purposes of this subsection—
The term "church" means a church or a convention or association of churches.
The term "employee" includes an employee described in section 414(e)(3)(B).
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.
(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.)
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