On October19, the Internal Revenue Service (IRS) issued an advance version of Notice 2016-63, addressing the “reasonable mortality charge” requirement under IRC §§7702 and 7702A for life insurance contracts based on the 2017 Commissioners’ Standard Ordinary (CSO) mortality and morbidity tables. The “reasonable mortality charge” requirement is set forth in IRC §7702(c)(3)(B)(i) and applies under: The cash value accumulation test of IRC §7702(b), The guideline premium limitation of IRC §7702(c), and The 7-pay test of IRC §7702A(b).

It could very well turn out that the alternative is as good or better as the original solution. As it turns out, it may not even be necessary to issue a U.S. tax compliant product in order to implement this strategy.Insurance Law and Tax Considerations IRC Sec. 7702 is the U.S. tax law definition of life insurance. The tax laws require that a contract be considered “life insurance” under the insurance laws that apply to the contract.

The tax-favored treatment is not hard to understand given the universal importance of the social welfare of families. In many cases, the international taxation of life insurance and annuities is superior to U.S. taxation primarily because of the rigid and complex U.S. definition of life insurance in the Internal Revenue Code (IRC Sec 7702 for life insurance and IRC Sec 72 for annuities). International life insurance generally requires a fraction of the mortality risk of U.S. life insurance.

For example, Internal Revenue Code (IRC) Section 7702 limited the permitted amount of funding in order for the policy to retain its character as insurance. More recently, however, PPLI policies benefitted from changes to IRC Section 7702 that introduced a formulaic interest rate for determining the maximum amount of premium that can be paid into a policy and meet certain tests and non-MEC classification. IRC Section 7702 now incorporates a dynamic interest rate model for defining the statutory minimum interest rates.

Family-Owned Life Insurance™ (FOLI)Based on size and reach of the COLI, BOLI, and IOLI marketplaces, family offices need to come to terms with the idea that life insurance is the most tax-advantaged on Planet Earth. The biggest limitations to overcome are the reinsurance limits of an individual policy and the tax law definition of life insurance found in IRC Sec 7702. These two factors determine the premium limits of a life insurance policy.

000 or under, the distributions can be made directly to the participant. For participants with account balances between $1,000 and $5,000, the distribution must be rolled over to an individual retirement account (IRA) established for the participant unless the participant consents to a direct distribution. Under SECURE Act 2.0, the involuntary cashout/rollover limit increases from $5,000 to $7,000.Long-Term Care Distributions (Effective for Distributions Made After December 28, 2025)Distributions from a retirement plan before a participant reaches age 59½ (or age 55, if the benefit is in the form of an annuity) are subject to a 10 percent early withdrawal tax penalty unless an exception applies. SECURE Act 2.0 creates a new exception to the early withdrawal tax for distributions used to pay for certified long-term care insurance. “Certified long-term care insurance” has a very technical definition that loosely covers a qualified long-term care insurance contract, within the meaning of IRC Section 7702, or a rider or other provision under a life insurance or annuity contract that either covers the risk that the insured becomes chronically ill or provides meaningful assistance if the insured requires home-based or nursing home care. The exception from the 10 percent early withdrawal penalty will be limited to the lesser of (a) the cost of the insurance, (b) 10 percent of the participant’s vested account balance, or (c) $2,500 annually (to be adjusted for the cost of living).Exception to the 10 Percent Penalty for Distributions for Terminally Ill Participants (Effective Immediately)SECURE Act 2.0 provides an additional exception to the 10 percent early withdrawal penalty for distributions to terminally ill participants. “Terminally ill participants” are defined as those certified by a physician as having a terminal illness or condition that can reasonably result in death within 84 months of the date of the certification. Terminally ill participants who take distributions have the opti

A PPLI policy may be structured to include stocks and bonds, hedge funds, and private equity funds. Section 7702 of the Internal Revenue Code allows the cash value of the PPLI policy to grow free of income tax. In addition, if the PPLI policy is owned by an irrevocable trust, the life insurance benefit tied to the portfolio can potentially escape the federal estate tax, which has a top rate of 40%.Investment portfolios often consist of tax-inefficient investments.

IRC Sec 2042 provides that as long as the insured does not retain any incidents of ownership within the policy, the death proceeds will not be included in the taxable estate of the decedent. The tax law definition of life insurance can be found in IRC Section 7702. The Code provides for two different definitions of life insurance.

The policy funding strategy calls for single premium of $30 million. The policy has an initial death benefit of $65 million, the lowest allowable death benefit under the tax law definition of life insurance, IRC Sec 7702. The policy is a MEC.

Additionally, variable annuities also must also comply with the rules for variable insurance products found in IRC Sec 817(h) and Treasury Regulation 1.817-5. Variable universal life insurance contracts must comply with the tax law definition of life insurance found in IRC Sec 7702 as well as the diversification requirements in IRC Sec 817(h) and Treasury Regulation 1.817-5. As previously discussed both products are tax-advantaged.