![]() ![]() The comparison to the rate or rates guaranteed under the contract continues to remain in effect in addition, the 4-percent and 6-percent reference rates were retained as a cap on the Insurance Interest Rate. 31, 2020, the fixed 4-percent and 6-percent minimum annual effective rates under these tests were changed to refer to a market-based rate called the “Insurance Interest Rate” (as described below). Recent Changes to the 7702 Interest Rate AssumptionĪt the end of December 2020, Congress enacted the Consolidated Appropriations Act, 2021, which included revisions to Section 7702. Other products may continue to be issued with lower guarantees, but the GPT limitation on premiums in combination with low interest rates could cause the policy values to be depleted long before the death of the insured, resulting in significantly increased costs to retain the coverage at older ages. Some products likely would not be offered in the future since the prolonged historical low interest environment, together with the current health and economic crises, made it much less certain that interest could be credited over the lifetime of a newly issued policy in excess of the 4-percent minimum rate. In an environment of exceptionally low interest rates, the mandatory interest rate assumptions for the CVAT and GPT made it more difficult for consumers to maintain long-term life insurance coverage. It was thus reasonable to assume that policies would be credited with at least a 4-percent (or 6-percent) interest rate over the life of the policy and, therefore, consumers could adequately fund their policies. When section 7702 was enacted in 1984, interest rates were high. Reason for the Change in 7702 Interest Rates These same interest rates used for CVAT and the guideline level premium are also used in section 7702A. ![]() Computation of the guideline level premium is made on the same basis as that for the guideline single premium, except that the prescribed interest rate is 4 percent instead of 6 percent. Computation of the guideline single premium uses an interest rate that is the greater of a 6-percent annual effective rate or the rate or rates guaranteed on the issuance of the contract. Prior to the recent change in the 7702 interest rate, the computation of the net single premium under CVAT uses an interest rate that is the greater of an annual effective rate of 4 percent or the rate or rates guaranteed on the issuance of the contract. If a policy fails the 7-pay test and becomes a MEC, the taxation of withdrawals under the contract is similar to that of an annuity, whereby taxable gain is withdrawn before cost basis.īoth the CVAT and the computations of the guideline premiums are actuarial determinations based upon interest rate assumptions. Under IRC § 7702A, a policy must pass the 7-pay test so that it is not categorized as a Modified Endowment Contract (MEC). The test is selected at issue and cannot be changed. The two tests are the Cash Value Accumulation Test (CVAT) and the Guideline Premium Test (GPT). In order to qualify to meet the “Definition of Life Insurance,” a policy must pass one of two tests so that death benefits are income tax free and so that the inside build-up of cash value is not taxable. ![]() As most product development actuaries are well aware, IRC § 7702 sets limits on premiums, cash values and death benefits for life insurance policies in order to qualify for preferential income tax treatment. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |