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Interest rates modernized for testing life insurance contracts

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January 2021

Overview

President Donald Trump signed into law on December 27 the Consolidated Appropriations Act, 2021 (the Appropriations Act), combining stimulus relief for the COVID-19 pandemic and appropriations for the federal fiscal year ending September 30, 2021. The Appropriation Act's tax provisions include an amendment to Section 7702, which defines the term ‘life insurance contract’ for federal income tax purposes. 

The amendment modernizes the interest rates used for purposes of the actuarial tests that are a part of that definition, and increases the amount by which those contracts are permitted to be funded and still qualify for the benefits of life insurance for tax purposes during periods of low interest rates. The amendment applies to contracts issued after December 31, 2020.

The takeaway

The recent amendment to Section 7702 applies to contracts issued after December 31, 2020, and therefore the new interest rates already are in effect. Although continuing to test using the old rates is unlikely to produce failures, most issuers already are considering how best to implement the new provision.

Implementation will require insurers to consider a number of issues. For example:

  • What changes to policy forms and illustrations, and to administration systems, are appropriate;
  • How will any ‘fail-safe’ language in legacy contracts be administered; and
  • What changes to existing contracts could cause the contracts to be treated as newly issued under the provision?

Finally, companies will need to monitor when there is an adjustment year so their systems use the correct rates for Section 7702 testing purposes going forward. The lag between a change in the NAIC-prescribed valuation rate on the one hand, and the adjustment year on the other, should allow companies time to use the correct rates.

Contact us

Julie Goosman

Insurance Tax Services Leader, PwC US

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