26 U.S.C. § 7702 : US Code - Section 7702: Life insurance contract defined

Search 26 U.S.C. § 7702 : US Code - Section 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 - 
        (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).
    (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,
          (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.
    (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 - 
          (A) the guideline single premium, or
          (B) the sum of the guideline level premiums to such date.
      (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,
            (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.
        (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.
        (D) Special rules for subparagraph (B)(ii)
          (i) Charges not specified in the contract
            If any charge is not specified in the contract, the amount
          taken into account under subparagraph (B)(ii) for such charge
          shall be zero.
          (ii) New companies, etc.
            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.
      (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          The applicable percentage    
          with an attained age as              shall decrease by a       
          of the beginning of the            ratable portion for each    
             contract year of:                      full year:           

        More than:         2But not            From:             To:     
                          more than:                                     
    --------------------------------------------------------------------
    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)) - 
          (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.
      (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 - 
            (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.
    (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.
        (C) Interest returned includible in gross income
          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.
      (2) Cash values
        (A) Cash surrender value
          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.
        (B) Net surrender value
          The net surrender value of any contract shall be determined
        with regard to surrender charges but without regard to any
        policy loan.
      (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).
      (4) Future benefits
        The term "future benefits" means death benefits and endowment
      benefits.
      (5) Qualified additional benefits
        (A) In general
          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.
        (B) Treatment of qualified additional benefits
          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.
        (C) Treatment of other additional 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.
      (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 - 
            (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).
        (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 - 
            (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).
        (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
          (B) reasonable steps are being taken to remedy the error,

      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 - 
            (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.
        (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 -
        
            (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.
      (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
      (1) In general
        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.
      (2) Definition of endowment contract
        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).
    (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 - 
          (A) requires at least 20 nondecreasing annual premium
        payments, and
          (B) is issued pursuant to an existing plan of insurance.
      (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).
      (3) Definitions
        For purposes of this subsection - 
        (A) Church
          The term "church" means a church or a convention or
        association of churches.
        (B) Employee
          The term "employee" includes an employee described in section
        414(e)(3)(B).
    (k) Regulations
      The Secretary shall prescribe such regulations as may be
    necessary or appropriate to carry out the purposes of this section.