7702 - IRC - Internal Revenue Code

  • Robert MARKS: Do any companies have concerns regarding not being able to charge a premium that would be high enough to mature the policy on a current interest rate basis with the new guideline premiums being lower?
    • In other words, since the interest rates are being credited or say, in the 5 to 5.5 percent range, and there's a six percent interest rate in the calculation of guideline single premiums, would there be a concern that you couldn't even fund the policy on a guaranteed basis?
  • Scott Berlin, New York Life. I've heard of that issue.
    • Your guideline level is calculated at four percent.
    • ⇒ This is just my feeling, but I don't think that we want to approach the Service to reduce the interest rates from four percent to say, 2.5 to 3 percent because then it opens 7702 up for scrutiny and a whole host of other issues.
    • Sometimes the evil you know is better than the evil you don't.

2002 - SOA - Implications of the New CSO Mortality Table, Society of Actuaries - 28p

  • 7.10 If the guideline level premium will not provide coverage to the end of the term of the contract, does the illustration have to display the annual term charges allowed by § 7702 or can the illustration explain that the coverage will terminate?
  • See Question 7.9. Either may be illustrated as long as the insurer discloses the effect of what is illustrated.

1997 0319 - NAIC - Questions & Answers: Life Illustrations Model Regulation - 22p

  • 1988 - SOA - The Definition of Life Insurance Under Section 7702 of the Internal Revenue Code, by Christian J. DesRochers, Society of Actuaries - 56p
  • 1988 - LR - Reflections on the Meaning of Life: An Analysis of Section 7702 and the Taxation of Cash Value Life Insurance, by Andrew Pike - 98p
  • 1989 - SOA - Product Design and Marketing Under Section 7702A, Society of Actuaries -  14p
  • 1995 - SOA - Failed Contracts Under International Revenue Code (IRC) Section 7702, Society of Actuaries - 20p
  • 1997 0319 - NAIC - Questions & Answers: Life Illustrations Model Regulation - 22p
  • 2004 / 2015 - Book - Life Insurance and Modified Endowments Under Internal Revenue Code  - Sections 7702 and 7702A, Second Edition, by Christian J. DesRochers,, John T. Adney, Brian King and Craig Springfield
  • 2020 - GOV - The Heroes Act - appropriations.house.gov/sites/democrats.appropriations.house.gov/files/documents/Heroes%20Act%20Summary.pdf
  • 2021 - GOV (House) - Consolidated Appropriations Act
    • congress.gov/116/bills/hr133/BILLS-116hr133enr.pdf
    • NAIC - LAHTF
    • Section 205 (“New IRC 7702”), Congress amended IRC 7702 by changing the fixed (4% and 6%) interest rates to variable interest rates.
    • The fixed interest rates used in IRC 7702 calculations were enacted in 1984 and had not been updated since then.
    •  The new interest rates apply to life policies issued after 12/31/2020
    • “Insurance Interest Rate”
    • Applicable Accumulation Test Minimum Rate (“AATMR”)
    • Sec. 205. Minimum rate of interest for certain determinations related to life insurance contracts (p1858)
  • 2021 - SOA - Recent Change to IRC § 7702 Interest Rates and Impact on Life Insurance Products - [link]
  • ACLI - Congressional Record
  • EDWARD P. MOHORIC: With regard to new business, certainly on annuities, a way to avoid the minimum guarantee problem in the future is to have products with a lower rate guarantee like 3%.
    • With the new nonforfeiture law it might be as low as 2.5%.
      • With life insurance you really don't have that option because of Section 7702.
    • I'm curious as to whether anyone is up to date or knows the IRS status in terms of reviewing Section 7702 to allow something other than 4% for your premium test.
    • I had heard the IRS is looking into it.
    • I don't know if that means that it is going to come up with something next month or in 1999.
  • MR. CROWNE: I think it does point to a need for some kind of dynamic rate for the 7702 test.
  • BRUCE D. SCHOBEL: The Internal Revenue Code's definition of life insurance (in section 7702) includes premium limits that are determined by using interest rates that:
    • At lower guaranteed rates, a contract's premiums could be too high for the contract to qualify as life insurance under the law.
    • Unfortunately, the minimum interest rates are set by the statute, not by the Internal Revenue Service.
    • The only way to change the rates is to change the law; the IRS cannot do it by regulation or ruling.

1994 - SOA - Long-Term Minimum Interest Rate Guarantees, Society of Actuaries - 18p

  • I’ll talk about the complications.
    • The typical policy that runs into this issue is a policy with a 3% interest guarantee where the guideline level premium requires a 4% interest guarantee.
    • Therefore, under the policy guarantees, and by paying the guideline level premium year by year, the policy will expire at age 68 without value. --- It’ll be term to 68.
    • Your guideline level premium is less than the premium that would be theoretically required to mature the policy at age 100 or 95.
    • Therein lies the problem.
    • If you were to use that interpretation, it makes the reserving calculation extremely complex.
  • Let me give an example. I’m going to contradict what I just said in this example.
    • The policy doesn’t really expire at age 68 because there’s a provision in 7702 that enables you to pay YRT premiums if the policy would otherwise lapse.

  --  Edward L. Robbins

1999 - SOA - 1999 Valuation Actuary Symposium - Session 44, Society of Actuaries - 28p

  • Abstract: RP 2008-40 allows issuers of life insurance contracts that have failed to meet the definition of life insurance contract under section 7702 or to satisfy the requirements of section 101(f) of the IRC to cure these contracts so that they do not fail section 7702 or section 101(f).
    • RP 2008-38 allows issuers of variable contracts that have failed to meet the diversification requirements of section 817(h) to cure these contracts so that they do not fail section 817(h).
    • RP 2008-39 allows issuers of life insurance contracts whose contracts have failed to meet the tests of section 7702A to cure these contracts that have inadvertently become modified endowment contracts.
    • Rev. Proc. 2008-41 provides a procedure by which an issuer of a variable contract may remedy an inadvertent failure of a variable contract to meet the diversification requirements of section 817(h). RP 2008-42 provides guidance.

federalregister.gov/documents/2017/07/14/2017-14823/agency-information-collection-activities-submission-for-omb-review-comment-request-multiple-irs