[Federal Register Volume 70, Number 99 (Tuesday, May 24, 2005)]
[Proposed Rules]
[Pages 29671-29675]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-10166]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-168892-03]
RIN 1545-BD00
Attained Age of the Insured Under Section 7702
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations explaining how to
determine the attained age of an insured for purposes of testing
whether a contract qualifies as a life insurance contract for Federal
income tax purposes. This document also provides notice of a public
hearing on these proposed regulations.
DATES: Written or electronic comments must be received by August 24,
2005. Requests to speak and outlines of topics to be discussed at the
public hearing scheduled for Wednesday, September 14, 2005, must be
received by August 24, 2005.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-168892-03), room
5203, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Comments may be hand delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
168892-03), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or submitted to the IRS Web site at http://www.irs.gov/regs or via the Federal eRulemaking Portal at http://www.regulations.gov (IRS-REG-168892-03). All comments will be available
for public inspection and copying. Requests to speak, with outlines of
topics to be discussed, at the hearing scheduled for September 14,
2005, at 10 a.m., must be received by August 24, 2005. The public
hearing will be held in the IRS Auditorium (7th Floor), Internal
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Ann H.
Logan, (202) 622-3970. Concerning submission of comments, the hearing,
or to be placed on the building access list to attend the hearing,
Lanita Van Dyke of the Publication and Regulations Branch, (202) 622-
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 7702(a) of the Internal Revenue Code (Code) provides that,
for a contract to qualify as a life insurance contract for Federal
income tax purposes, the contract must be a life insurance contract
under the applicable law and must either (1) satisfy the cash value
accumulation test of section 7702(b), or (2) both meet the guideline
premium requirements of section 7702(c) and fall within the cash value
corridor of section 7702(d). To determine whether a contract satisfies
the cash value accumulation test, or meets the guideline premium
requirements and falls within the cash value corridor, it is necessary
to determine the attained age of the insured.
A contract meets the cash value accumulation test of section
7702(b) if, by the terms of the contract, the cash surrender value of
the contract may not at any time exceed the net single premium that
would have to be paid at that time to fund future benefits under the
contract. Under section 7702(e)(1)(B), the maturity date of the
contract is 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, for purposes of applying the cash value accumulation test.
A contract meets the guideline premium requirements of section
7702(c) if the sum of the premiums paid under the contract does not at
any time exceed the greater of the guideline single premium or the sum
of the guideline level premiums as of such time. The guideline single
premium is the premium that is needed at the time the policy is issued
to fund the future benefits under the contract based on the following
three elements enumerated in section 7702(c)(3)(B):
(i) Reasonable mortality charges that meet the requirements (if
any) prescribed in regulations and that (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;
[[Page 29672]]
(ii) Any reasonable charges (other than mortality charges) that (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 six
percent or the rate or rates guaranteed on issuance of the contract.
The guideline level premium is the level annual amount, payable
over a period not ending before the insured attains age 95, computed on
the same basis but using a minimum interest rate of four percent,
rather than six percent. Like the cash value accumulation test, the
guideline premium requirements are applied by deeming the maturity date
of the contract 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. The deemed maturity date generally is the determination date
set forth in the contract or the end of the mortality table (which,
when section 7702 was enacted in 1984, was age 100).
A contract falls within the cash value corridor if the death
benefit of the contract at any time is not less than the applicable
percentage of the cash surrender value. The applicable percentage is
determined based on the attained age of the insured as of the beginning
of the contract year, as follows:
Applicable Percentage
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In the case of an insured with an The applicable percentage shall
attained age as of the the beginning decrease by a ratable portion for
of the contract year of: each full year:
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But not more
More than: than: From: To:
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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
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The Code does not define the attained age of the insured for
purposes of applying the cash value corridor, the guideline premium
limitations, and the computational rules of section 7702(e). The Senate
Finance Committee explanation of the Deficit Reduction Act of 1984,
Public Law 98-369 (98 Stat. 494), however, states that the attained age
of the insured means the insured's age determined by reference to
contract anniversaries (rather than the individual's actual birthdays),
so long as the age assumed under the contract is within 12 months of
the actual age. See S. Prt. No. 98-169, Vol. 1, at 576 (1984).
Section 7702A defines a modified endowment contract as a contract
that meets the requirements of section 7702 (that is, a contract that
is a life insurance contract), but that fails to meet the 7-pay test
set forth in section 7702A(b). A contract fails to meet the 7-pay test
if the accumulated amount paid under the contract at any time during
the first 7 contract years exceeds the sum of the net level premiums
that would have been paid on or before that time if the contract
provided for paid-up future benefits after the payment of 7 level
annual premiums. Section 7702A(c)(1)(B) provides that, for purposes of
this test, the computational rules of section 7702(e) generally apply,
including the contract's deemed maturity 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.
In sum, the attained age of an insured under a contract that is a
life insurance contract under the applicable law must be determined to
test whether the contract complies with the guideline premium
requirements of section 7702(c), the cash value corridor of section
7702(d), and (by reason of the computational rules of section 7702(e))
the cash value accumulation test of section 7702(b) and the 7-pay test
of section 7702A(b), as applicable.
Discussion
Although most life insurance contracts insure the life of one
person, some life insurance contracts insure multiple lives. For
example, a last-to-die life insurance contract (sometimes referred to
as a survivorship or second-to-die life insurance contract) insures two
or more lives and pays death benefits when the last insured dies. Such
contracts are sometimes used in connection with business continuation
or estate tax planning; the contracts typically involve lower premiums
than do contracts insuring a single life.
A first-to-die life insurance contract (sometimes referred to as a
joint life insurance contract) also insures two or more lives, but pays
death benefits and terminates upon the death of the first insured.
These contracts typically involve higher risks and thus higher premiums
than do contracts insuring a single life. First-to-die life insurance
contracts represent a small percentage of the multiple-life insurance
contracts that are issued.
Section 7702A, which defines the term modified endowment contract
(MEC), incorporates the computational rules of section 7702, both in
its initial determination of whether a contract is a life insurance
contract, and in its 7-pay test calculations. Further, section
7702A(c)(6) provides a specific computational rule that applies to
multiple life insurance contracts if the death benefit under the
contract is reduced.
Neither section 7702, section 7702A, nor the legislative history of
either provision, addresses how an insured's attained age is determined
for purposes of testing a life insurance contract insuring multiple
lives under the cash value accumulation test of section 7702(b), the
guideline premium requirements of section 7702(c), or the computational
rules of section 7702(e).
Explanation of Provision
This document contains proposed amendments to 26 CFR part 1 under
section 7702. The proposed regulations provide guidance on how to
determine the attained age of an insured individual under a contract
that is a life insurance contract under the applicable law, for
purposes of testing whether the contract
[[Page 29673]]
qualifies as a life insurance contract under section 7702 and is a MEC
under section 7702A. Under the proposed regulations, the attained age
of the insured under a contract insuring the life of a single
individual is either (i) the insured's age determined by reference to
the individual's actual birthday as of the date of determination
(actual age) or (ii) the insured's age determined by reference to
contract anniversary (rather than the individual's actual birthday), so
long as the age assumed under the contract (contract age) is within 12
months of the actual age. The attained age of the insured under a
contract insuring multiple lives on a last-to-die basis is the attained
age of the youngest insured. The attained age of the insured under a
contract insuring multiple lives on a first-to-die basis is the
attained age of the oldest insured. The Treasury Department and the IRS
understand that the approach of the proposed regulations is consistent
with the existing practice of many (but not all) issuers of both
contracts insuring a single life and contracts insuring multiple lives.
In addition, by mandating the use of a single, predictable age, the
proposed regulations provide rules that are straightforward for both
issuers and the IRS to administer.
The proposed regulations generally would be applicable for
contracts issued on or after the date that is one year after the
regulations are published as final regulations in the Federal Register.
This applicability date recognizes that some issuers will need time to
conform their compliance system to the proposed standard for the
issuance of new contracts, to file policy forms with State authorities,
or both. Taxpayers also would be permitted to apply the regulations
retroactively for contracts issued before the date that is one year
after the regulations are published as final regulations, provided they
do not later determine qualification of those contracts under section
7702 in a manner inconsistent with the regulations.
The proposed regulations defining the attained age for purposes of
these provisions are not intended to specify which multiple-life
actuarial methodologies are appropriate to determine reasonable
mortality charges under sections 7702 and 7702A, or how any such
methodology should be applied.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on their impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are timely submitted to the
IRS. In addition to comments on the proposed regulations more
generally, the IRS and Treasury Department specifically request
comments on (i) the clarity of the proposed regulations and how they
can be made easier to understand, (ii) the industry's existing practice
for determining the attained age to use under both last-to-die and
first-to-die life insurance contracts, (iii) the need for special rules
for determining the attained age of one or more insureds to calculate
mortality charges under section 7702(c)(3)(B)(i), and (iv) the
effective date of the proposed regulations. All comments will be
available for public inspection and copying.
A public hearing has been scheduled for September 14, 2005, at 10
a.m., in the IRS Auditorium (7th Floor), Internal Revenue Building,
1111 Constitution Avenue, NW., Washington, DC. All visitors must
present a photo identification to enter the building. Because of access
restrictions, visitors must use the Constitution Avenue entrance and
will not be admitted beyond the Internal Revenue Building lobby more
than 30 minutes before the hearing starts. For information about having
your name placed on the building access list to attend the hearing, see
the FOR FURTHER INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons who wish to present oral comments at the hearing must
submit written comments by August 24, 2005, and submit an outline of
the topics to be discussed and the time to be devoted to each topic (a
signed original and eight (8) copies) by that same date.
A period of 10 minutes will be allotted to each person(s) for
making comments. An agenda showing the scheduling of the speakers will
be prepared after the deadline for receiving outlines has passed.
Copies of the agenda will be available free of charge at the hearing.
Drafting Information
The principal author of these proposed regulations is Ann H. Logan,
Office of the Associate Chief Counsel (Financial Institutions and
Products), Office of Chief Counsel, Internal Revenue Service. However,
personnel from other offices of the IRS and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income Taxes.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.7702-2 also issued under 26 U.S.C. 7702(k). * * *
Par. 2. Section 1.7702-0, proposed to be added at 56 FR 30720 and
published on July 5, 1991, and further proposed to be amended at 57 FR
59321 and published December 15, 1992, is further proposed to be
revised to read as follows:
Sec. 1.7702-0 Table of contents.
This section lists the captions that appear in Sec. Sec. 1.7702-1,
1.7702-2, and 1.7702-3:
Sec. 1.7702-1 Mortality charges.
(a) General rule.
(b) Reasonable mortality charges.
(1) Actually expected to be imposed.
(2) Limit on charges.
(c) Safe harbors.
(1) 1980 C.S.O. Basic Mortality Tables.
(2) Unisex tables and smoker/nonsmoker tables.
(3) Certain contracts based on 1958 C.S.O. table.
(d) Definitions.
(1) Prevailing commissioners' standard tables.
(2) Substandard risk.
(3) Nonparticipating contract.
(4) Charge reduction mechanism.
(5) Plan of insurance.
(e) Effective date.
Sec. 1.7702-2 Definitions.
(a) In general.
(b) Cash value.
[[Page 29674]]
(1) In general.
(2) Amounts excluded from cash value.
(c) Death benefit.
(1) In general.
(2) Qualified accelerated death benefit treated as death benefit.
(d) Qualified accelerated death benefit.
(1) In general.
(2) Determination of present value of the reduction in death
benefit.
(3) Examples.
(e) Terminally ill defined.
(f) Certain other additional benefits.
(1) In general.
(2) Examples.
(g) Adjustments under section 7702(f)(7)
(h) Cash surrender value.
(1) In general.
(2) For purposes of section 7702(f)(7)
(i) Net surrender value.
(j) Effective date and special rules.
(1) In general.
(2) Provision of certain benefits before July 1, 1993.
(i) Not treated as cash value.
(ii) No effect on date of issuance.
(iii) Special rule for addition of benefit or loan provision after
December 15, 1992.
(3) Addition of qualified accelerated death benefit.
(4) Addition of other additional benefits.
Sec. 1.7702-3 Attained age of the insured under a life insurance
contract.
(a) In general.
(b) Contract insuring a single life.
(c) Contract insuring multiple lives on a last-to-die basis.
(d) Contract insuring multiple lives on a first-to-die basis.
(e) Examples.
(f) Effective dates.
(1) In general.
(2) Contracts issued before the general effective date.
Par. 3. Section 1.7702-3 is added to read as follows:
Sec. 1.7702-3 Attained age of the insured under a life insurance
contract.
(a) In general. This section provides guidance on determining the
attained age of an insured under a contract that is a life insurance
contract under the applicable law, for purposes of testing whether the
contract complies with the guideline premium requirements of section
7702(c), the cash value corridor of section 7702(d), and the
computational rules of section 7702(e), as applicable.
(b) Contract insuring a single life. (1) If a contract insures the
life of a single individual, either of the following two ages may be
treated as the attained age of the insured with respect to that
contract--
(i) The insured's age determined by reference to the individual's
actual birthday as of the date of determination (actual age); or
(ii) The insured's age determined by reference to contract
anniversary (rather than the individual's actual birthday), so long as
the age assumed under the contract (contract age) is within 12 months
of the actual age.
(2) Whichever attained age is used with respect to a contract must
be used consistently from year to year and consistently for purposes of
sections 7702(c), 7702(d), and 7702(e), as applicable.
(c) Contract insuring multiple lives on a last-to-die basis. If a
contract insures the lives of more than one individual on a last-to-die
basis, the attained age of the insured is determined by applying
paragraph (b) of this section as if the youngest individual were the
only insured under the contract.
(d) Contract insuring multiple lives on a first-to-die basis. If a
contract insures the lives of more than one individual on a first-to-
die basis, the attained age of the insured is determined by applying
paragraph (b) of this section as if the oldest individual were the only
insured under the contract.
(e) Examples. The following examples illustrate the determination
of the attained age of the insured for purposes of testing whether the
contract complies with the guideline premium requirements of section
7702(c), the cash value corridor of section 7702(d), and the
computational rules of section 7702(e), as applicable. The examples are
as follows:
Example 1. (i) X was born on May 1, 1947. On January 1, 2008, X
purchases from IC a contract insuring X's life. January 1 is the
contract anniversary date for all future years. Under the contract,
X's premiums are determined on an age-last-birthday basis. X became
60 years old on May 1, 2007. Based on the method used under the
contract to determine age, X has an attained age of 60 for the first
contract year, 61 for the second contract year, and so on.
(ii) Section 1.7702-3(b) provides that, if a contract insures
the life of a single individual, the insured's age may be determined
by reference to contract anniversary (rather than the individual's
actual birthday), so long as the contract age is within 12 months of
the actual age. For each contract year, X's contract age, determined
on an age-last-birthday basis, is within 12 months of X's actual
age. Accordingly, provided it does so consistently from year to
year, IC may compute X's attained age on an age-last-birthday basis
for purposes of testing whether a contract complies with the
guideline premium requirements of section 7702(c), the cash value
corridor of section 7702(d), and the computational rules of section
7702(e), as applicable.
Example 2. (i) The facts are the same as in Example 1 except
that, under the contract, X's premiums are determined on an age-
nearest-birthday basis. X's nearest birthday to January 1, 2008, is
May 1, 2008, when X will become 61 years old. Based on the method
used under the contract to determine age, X has an attained age of
61 for the first contract year, 62 for the second contract year, and
so on.
(ii) Section 1.7702-3(b) provides that, if a life insurance
contract insures the life of a single individual, the insured's age
may be determined by reference to contract anniversary (rather than
the individual's actual birthday), so long as the contract age is
within 12 months of the actual age. For each contract year, X's
contract age, determined on an age-nearest-birthday basis, is within
12 months of X's actual age. Accordingly, provided it does so
consistently from year to year, IC may compute X's attained age on
an age-nearest-birthday basis for purposes of testing whether the
contract complies with the guideline premium requirements of section
7702(c), the cash value corridor of section 7702(d), and the
computational rules of section 7702(e), as applicable.
Example 3. (i) The facts are the same as in Example 1 except
that in addition to X, the insurance contract also insures the life
of Y. Y was born on September 1, 1942. The death benefit will be
paid when the last of the two insureds dies.
(ii) Section 1.7702-3(c) provides that if a life insurance
contract insures the lives of more than one individual on a last-to-
die basis, the attained age of the insured is determined by applying
Sec. 1.7702-3(b) as if the youngest individual were the only
insured under the contract. Because X is younger than Y, the
attained age of X must be used for purposes of testing whether the
contract complies with the guideline premium requirements of section
7702(c), the cash value corridor of section 7702(d), and the
computational rules of section 7702(e), as applicable. The attained
ages of X and Y are determined as set forth in Example 1.
Example 4. (i) The facts are the same as Example 1 except that
in addition to X, the insurance contract also insures the life of Y.
Y was born on September 1, 1952. The death benefit will be paid when
the first of the two insureds dies.
(ii) Section 1.7702-3(d) provides that if a life insurance
contract insures the lives of more than one individual on a first-
to-die basis, the attained age of the insured is determined by
applying Sec. 1.7702-3(b) as if the oldest individual were the only
insured under the contract. Because X is older than Y, the attained
age of X must be used for purposes of testing whether the contract
complies with the guideline premium requirements of section 7702(c),
the cash value corridor of section 7702(d), and the computational
rules of section 7702(e), as applicable. The attained ages of X and
Y are determined as set forth in Example 1.
(f) Effective dates--(1) In general. Except as provided in
paragraph (f)(2), these regulations apply to contracts issued on or
after the date that is one year after the regulations are published as
final regulations in the Federal Register.
(2) Retroactive application. Pursuant to section 7805(b)(7), a
taxpayer may
[[Page 29675]]
elect to apply these regulations retroactively for contracts issued
before the date that is one year after the regulations are published as
final regulations in the Federal Register, provided that the taxpayer
does not later determine qualification of those contracts in a manner
that is inconsistent with these regulations.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-10166 Filed 5-20-05; 8:45 am]
BILLING CODE 4830-01-P