26 U.S.C. § 7702
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-
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.
Determinations under paragraph (1) shall be made-
For purposes of paragraph (2)(A), the term "applicable accumulation test minimum rate" means the lesser of-
For purposes of this section-
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.
The term "guideline premium limitation" means, as of any date, the greater of-
The term "guideline single premium" means the premium at issue with respect to future benefits under the contract.
The determination under subparagraph (A) shall be based on-
Except as provided in subsection (f)(7), the determination under subparagraph (A) shall be made as of the time the contract is issued.
If any charge is not specified in the contract, the amount taken into account under subparagraph (B)(ii) for such charge shall be zero.
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.
For purposes of subparagraph (B)(iii), the term "applicable guideline premium minimum rate" means the applicable accumulation test minimum rate (as defined in subsection (b)(3)) plus 2 percentage points.
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 "the applicable accumulation test minimum rate" for "the applicable guideline premium minimum rate".
For purposes of this section-
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.
| In the case of an insured with an attained age as of the beginning of the contract year of: | The applicable percentage shall decrease by a ratable portion for each full year: | ||
| More than: | But not more than: | From: | To: |
| 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. |
For purposes of this section (other than subsection (d))-
Notwithstanding paragraph (1)(A)-
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.
For purposes of this section-
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.
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.
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.
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.
The net surrender value of any contract shall be determined with regard to surrender charges but without regard to any policy loan.
The term "death benefit" means the amount payable by reason of the death of the insured (determined without regard to any qualified additional benefits).
The term "future benefits" means death benefits and endowment benefits.
The term "qualified additional benefits" means any-
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.
In the case of any additional benefit which is not a qualified additional benefit-
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).
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.
If-
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).
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-
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).
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.
If the taxpayer establishes to the satisfaction of the Secretary that-
the Secretary may waive the failure to satisfy such requirements.
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.
For purposes of subsection (c)(3)(B)(i), the term "prevailing commissioners' standard tables" means the most recent commissioners' standard tables prescribed by the National Association of Insurance Commissioners which are permitted to be used in computing reserves for that type of contract under the insurance laws of at least 26 States when the contract was issued. If the prevailing commissioners' standard tables as of the beginning of any calendar year (hereinafter in this paragraph referred to as the "year of change") are different from the prevailing commissioners' standard tables as of the beginning of the preceding calendar year, the issuer may use the prevailing commissioners' standard tables as of the beginning of the preceding calendar year with respect to any contract issued after the change and before the close of the 3-year period beginning on the first day of the year of change.
For purposes of this section-
The term "insurance interest rate" means, with respect to any contract issued in any calendar year, the lesser of-
The term "section 7702 valuation interest rate" means, with respect to any adjustment year, the prescribed U.S. valuation interest rate for life insurance with guaranteed durations of more than 20 years (as defined in the National Association of Insurance Commissioners' Standard Valuation Law) as effective in the calendar year immediately preceding such adjustment year.
The term "section 7702 applicable Federal interest rate" means, with respect to any adjustment year, the average (rounded to the nearest whole percentage point) of the applicable Federal mid-term rates (as defined in section 1274(d) but based on annual compounding) effective as of the beginning of each of the calendar months in the most recent 60-month period ending before the second calendar year prior to such adjustment year.
The term "adjustment year" means the calendar year following any calendar year that includes the effective date of a change in the prescribed U.S. valuation interest rate for life insurance with guaranteed durations of more than 20 years (as defined in the National Association of Insurance Commissioners' Standard Valuation Law).
Notwithstanding subparagraph (A), the insurance interest rate shall be 2 percent in the case of any contract which is issued during the period that-
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.
For purposes of this paragraph, the term "income on the contract" means, with respect to any taxable year of the policyholder, the excess of-
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.
For purposes of this paragraph, the cost of life insurance protection provided under the contract shall be the lesser of-
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.
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.
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.
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).
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).
For purposes of paragraph (1), the term "qualified 20-pay contract" means any contract which-
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.
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.
For purposes of this subsection, a plan or arrangement is described in this paragraph if-
For purposes of this subsection-
The term "church" means a church or a convention or association of churches.
The term "employee" includes an employee described in section 414(e)(3)(B).
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.
1 So in original. Probably should be "begins".
26 U.S.C. § 7702
EDITORIAL NOTES
AMENDMENTS2020-Subsec. (b)(2)(A). Pub. L. 116-260, §205(a)(1), substituted "the applicable accumulation test minimum rate" for "an annual effective rate of 4 percent".Subsec. (b)(3). Pub. L. 116-260, §205(a)(2), added par. (3).Subsec. (c)(3)(B)(iii). Pub. L. 116-260, §205(b)(1), substituted "the applicable guideline premium minimum rate" for "an annual effective rate of 6 percent".Subsec. (c)(3)(E). Pub. L. 116-260, §205(b)(2), added subpar. (E). Subsec. (c)(4). Pub. L. 116-260, §205(c), substituted "the applicable accumulation test minimum rate" for "4 percent" and "the applicable guideline premium minimum rate" for "6 percent".Subsec. (f)(11). Pub. L. 116-260, §205(d), added par. (11). 2017-Subsec. (c)(3)(B)(i). Pub. L. 115-97, §13517(a)(4)(A), added cl. (i) and struck out former cl. (i) which read as follows: "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,".Subsec. (f)(10). Pub. L. 115-97, §13517(a)(4)(B), added par. (10). 1988-Subsec. (c)(3)(B)(i), (ii). Pub. L. 100-647, §5011(a), added cls. (i) and (ii) and struck out former cls. (i) and (ii) which read as follows:"(i) the mortality charges specified in the contract (or, if none is specified, the mortality charges used in determining the statutory reserves for such contract),"(ii) any charges (not taken into account under clause (i)) specified in the contract (the amount of any charge not so specified shall be treated as zero), and".Subsec. (c)(3)(D). Pub. L. 100-647, §5011(b), added subpar. (D).Subsecs. (j), (k). Pub. L. 100-647, §6078(a), added subsec. (j) and redesignated former subsec. (j) as (k).1986-Subsec. (b)(2)(C). Pub. L. 99-514, §1825(a)(2), substituted "subparagraphs (A) and (D)" for "subparagraphs (A) and (C)".Subsec. (e)(1). Pub. L. 99-514, §1825(a)(3), inserted "(other than subsection (d))" after "section".Subsec. (e)(1)(B). Pub. L. 99-514, §1825(a)(1)(A), substituted "shall be deemed to be no earlier than" for "shall be no earlier than".Subsec. (e)(1)(C). Pub. L. 99-514, §1821(a)(1)(C), added subpar. (C). Former subpar. (C) redesignated (D).Subsec. (e)(1)(D). Pub. L. 99-514, §1821(a)(1)(C), (D), redesignated subpar. (C) as (D) and substituted "the maturity date determined by taking into account subparagraph (B)" for "the maturity date described in subparagraph (B)".Subsec. (e)(2)(C). Pub. L. 99-514, §1825(a)(4), added subpar. (C).Subsec. (f)(1)(A). Pub. L. 99-514, §1825(b)(2), substituted "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" for "less any other amounts received".Subsec. (f)(7). Pub. L. 99-514, §1825(b)(1), amended par. (7) generally. Prior to amendment, par. (7)(A), in general, read as follows: "In the event of a change in the future benefits or any qualified additional benefit (or in any other terms) under the contract which was not reflected in any previous determination made under this section, under regulations prescribed by the Secretary, there shall be proper adjustments in future determinations made under this section.", and par. (7)(B), certain changes treated as exchange, read as follows: "In the case of any change which reduces the future benefits under the contract, such change shall be treated as an exchange of the contract for another contract."Subsec. (g)(1)(B)(ii). Pub. L. 99-514, §1825(c), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: "the amount of premiums paid under the contract during the taxable year reduced by any policyholder dividends received during such taxable year."
STATUTORY NOTES AND RELATED SUBSIDIARIES
EFFECTIVE DATE OF 2020 AMENDMENT Pub. L. 116-260, div. EE, title II, §205(e), Dec. 27, 2020, 134 Stat. 3059, provided that: "The amendments made by this section [amending this section] shall apply to contracts issued after December 31, 2020."
EFFECTIVE DATE OF 2017 AMENDMENT Amendment by Pub. L. 115-97 applicable to taxable years beginning after Dec. 31, 2017, with transition rule and transition relief, see section 13517(c) of Pub. L. 115-97, set out as a note under section 807 of this title.
EFFECTIVE DATE OF 1988 AMENDMENTPub. L. 100-647, title V, §5011(d), Nov. 10, 1988, 102 Stat. 3661, provided that: "The amendments made by this section [amending this section] shall apply to contracts entered into on or after October 21, 1988."Pub. L. 100-647, title VI, §6078(b), Nov. 10, 1988, 102 Stat. 3709, provided that: "The amendment made by subsection (a) [amending this section] shall take effect as if included in the amendment made by section 221(a) of the Tax Reform Act of 1984 [Pub. L. 98-369, which enacted this section]."
EFFECTIVE DATE OF 1986 AMENDMENTPub. L. 99-514, title XVIII, §1825(a)(4), Oct. 22, 1986, 100 Stat. 2846, as amended by Pub. L. 100-647, title I, §1018(j), Nov. 10, 1988, 102 Stat. 3583, provided that the amendment made by that section is effective with respect to contracts entered into after Oct. 22, 1986. Amendment by section 1825(a)(1)-(3), (b), (c) of Pub. L. 99-514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98-369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99-514, set out as a note under section 48 of this title.
EFFECTIVE DATEPub. L. 98-369, div. A, title II, §221(d), July 18, 1984, 98 Stat. 772, as amended by Pub. L. 99-514, §2, title XVIII, §§1825(e), 1899A(69), Oct. 22, 1986, 100 Stat. 2095, 2848, 2962, provided that:"(1) IN GENERAL.-Except as otherwise provided in this subsection, the amendments made by this section [enacting this section and amending section 101 of this title and provisions set out as a note under section 101 of this title] shall apply to contracts issued after December 31, 1984, in taxable years ending after such date."(2) SPECIAL RULE FOR CERTAIN CONTRACTS ISSUED AFTER JUNE 30, 1984.-"(A) GENERAL RULE.-Except as otherwise provided in this paragraph, the amendments made by this section shall apply also to any contract issued after June 30, 1984, which provides an increasing death benefit and has premium funding more rapid than 10-year level premium payments."(B) EXCEPTION FOR CERTAIN CONTRACTS.-Subparagraph (A) shall not apply to any contract if-"(i) such contract (whether or not a flexible premium contract) would meet the requirements of section 101(f) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954],"(ii) such contract is not a flexible premium life insurance contract (within the meaning of section 101(f) of such Code) and would meet the requirements of section 7702 of such Code determined by-"(I) substituting '3 percent' for '4 percent' in section 7702(b)(2) of such Code, and"(II) treating subparagraph (B) of section 7702(e)(1) of such Code as if it read as follows: 'the maturity date shall be the latest maturity date permitted under the contract, but not less than 20 years after the date of issue or (if earlier) age 95', or "(iii) under such contract-"(I) the premiums (including any policy fees) will be adjusted from time-to-time to reflect the level amount necessary (but not less than zero) at the time of such adjustment to provide a level death benefit assuming interest crediting and an annual effective interest rate of not less than 3 percent, or"(II) at the option of the insured, in lieu of an adjustment under subclause (I) there will be a comparable adjustment in the amount of the death benefit."(C) CERTAIN CONTRACTS ISSUED BEFORE OCTOBER 1, 1984.-"(i) IN GENERAL.-Subparagraph (A) shall be applied by substituting 'September 30, 1984' for 'June 30, 1984' in the case of a contract-"(I) which would meet the requirements of section 7702 of such Code if '3 percent' were substituted for '4 percent' in section 7702(b)(2) of such Code, and the rate or rates guaranteed on issuance of the contract were determined without regard to any mortality charges and any initial excess interest guarantees, and"(II) the cash surrender value of which does 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."(ii) DEFINITIONS.-For purposes of clause (i)-"(I) IN GENERAL.-Except as provided in subclause (II), terms used in clause (i) shall have the same meanings as when used in section 7702 of such Code."(II) NET SINGLE PREMIUM.-The term 'net single premium' shall be determined by substituting '3 percent' for '4 percent' in section 7702(b)(2) of such Code, by using the 1958 standard ordinary mortality and morbidity tables of the National Association of Insurance Commissioners, and by assuming a level death benefit."(3) TRANSITIONAL RULE FOR CERTAIN EXISTING PLANS OF INSURANCE.-A plan of insurance on file in 1 or more States before September 28, 1983, shall be treated for purposes of section 7702(i)(3) of such Code as a plan of insurance on file in 1 or more States before September 28, 1983, without regard to whether such plan of insurance is modified after September 28, 1983, to permit the crediting of excess interest or similar amounts annually and not monthly under contracts issued pursuant to such plan of insurance."(4) EXTENSION OF FLEXIBLE PREMIUM CONTRACT PROVISIONS.-The amendments made by subsection (b) [amending section 101 of this title and provisions set out as a note under section 101 of this title] shall take effect on January 1, 1984. "(5) SPECIAL RULE FOR MASTER CONTRACT.-For purposes of this subsection, in the case of a master contract, the date taken into account with respect to any insured shall be the first date on which such insured is covered under such contract."
INTERIM RULES; REGULATIONS; STANDARDS BEFORE REGULATIONS TAKE EFFECTPub. L. 100-647, title V, §5011(c), Nov. 10, 1988, 102 Stat. 3661, provided that the Secretary of the Treasury would issue regulations under subsec. (c)(3)(B)(i) of this section and provided for a standard for contracts issues before the effective date of those regulations.
PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101-1147 and 1171-1177] or title XVIII [§§1800-1899A] of Pub. L. 99-514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99-514, as amended, set out as a note under section 401 of this title.
TREATMENT OF FLEXIBLE PREMIUM CONTRACTS ISSUED DURING 1984 WHICH MEET NEW REQUIREMENTSPub. L. 98-369, div. A, title II, §221(b)(3), as added by Pub. L. 99-514, title XVIII, §1825(d), Oct. 22, 1986, 100 Stat. 2848, provided that: "Any flexible premium contract issued during 1984 which meets the requirements of section 7702 of the Internal Revenue Code of 1954 [now 1986] (as added by this section) shall be treated as meeting the requirements of section 101(f) of such Code."
- Internal Revenue Code of 1986
- The term "Internal Revenue Code of 1986" means this title, and the term "Internal Revenue Code of 1939" means the Internal Revenue Code enacted February 10, 1939, as amended.
- Secretary of the Treasury
- The term "Secretary of the Treasury" means the Secretary of the Treasury, personally, and shall not include any delegate of his.
- Secretary
- The term "Secretary" means the Secretary of the Treasury or his delegate.
- State
- The term "State" shall be construed to include the District of Columbia, where such construction is necessary to carry out provisions of this title.
- taxable year
- The term "taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the taxable income is computed under subtitle A. "Taxable year" means, in the case of a return made for a fractional part of a year under the provisions of subtitle A or under regulations prescribed by the Secretary, the period for which such return is made.
- taxpayer
- The term "taxpayer" means any person subject to any internal revenue tax.