818c - IRC - Internal Revenue Code

  • We conclude that resolution of all of these issues will have a considerable impact on Universal Life product profitability, with the 818(c)2 deduction having the most critical financial impact.
  • What about all of our traditional products?

--   William R. Britton, Jr.

1983 - SOA - Individual Life Insurance, Society of Actuaries - 22p

  • The 1959 Act did this, in a provision codified as section 818(c) of the Internal Revenue Code, by allowing companies that hold reserves on a preliminary term basis to adjust those reserves to a net level basis for tax computation purposes.
  • As the Ways and Means Committee report explained in 1959 (H.R. Rep. No. 34, supra, at pp. 17- 18):  (p403)
  • 1983 0510, 0511 and 0728 - GOV (House) - Tax Treatment of Life Insurance




In the House negotiations, the negotiators for the insurance industry were willing to trade the section 818(c) reserve reevaluation tax benefit for the special life insurance company 20-percent deduction and the small company deduction-the one we just discussed.

  • This tradeoff took away a benefit for growing companies and replaced it with benefits for stable or shrinking companies.
  • The alternative provision is needed to offset this inherent bias against growing companies.


1982 GOV TEFRA Act of 1982 818 disguised term
  • 1981 - GAO - Billions Of Dollars Are Involved In Taxation Of The Life Insurance Industry -- Some Corrections In The Law Are Needed - 242p

The 818(c) election is another issue that is being looked at by the Service.

  • In the Hutton ruling, the Service specifically took a caveat indicating that they were saying nothing with respect to this issue.
  • One question that was discussed briefly was what was the plan of insurance?
    • How do you know whether you have a permanent policy that qualifies for $21 per thousand,
    • or a term policy that qualifies for $5,
    • or perhaps some that qualifies for nothing.
  • That is an unanswered question."

-- Wiliam B. Harman, JR

1981 - SOA - Universal Life, Society of Actuaries - 16p

  • Section 818(c) of the Income Tax Act also offers many companies financial incentive for holding CRVM rather than net level reserves.

--  John Angle

1980 - SOA - Nonforfeiture and Valuation Concerns in the 1980's , Society of Actuaries - 16p

  • MR. SILKES: Has any decision been made regarding the 818(c) deduction and the product that is known as Irreplaceable Life?
  • MR. BRITTON: It would seem that Irreplaceable Life wouId have more of a chance of getting a permanent 818(c)2 deduction than Universal Life would, because it is a permanent product (at least some of the later versions).

1983 - SOA - Individual Life Insurance, Society of Actuaries - 22p

  • Term products or graded premium whole life products are using tax losses created by electing the 818(c).

-- Lawrence Silkes

1983 - SOA - Individual Life Insurance, Society of Actuaries - 22p


  • 1985 - SOA - United States Life Insurance Tax Law, Society of Actuaries - 58p
  • 1989 - SOA - New Tax Developments, Audit Issues and Alternate Minimum Tax, Society of Actuaries - 16p
  • 2007 09 - SOA - Taxing Times, Tax Uncertainty Swirls Around Principles-Based Reserves (p15), by Christian DesRochers, Society of Actuaries - 40p
    • 6 For example, section 818(c), enacted in the 1959 Act, was arguably an effort to provide an equivalent reserve deduction among companies. It permitted companies holding modified reserves an approximate recalculation to a net level basis in determining deductible
      reserve amounts 


Regarding 818(c), some companies are now starting to get in the audit cycle where their universal life products are being examined by the Internal Revenue Service (IRS).

  • It's not uncommon to have a 3-5 year delay on an audit, so there's not a lot of experience to date.
  • But we've had four or five companies that started issuing universal life in late 1979 and 1980 that have been subject to examination.

It looks like there are going to be two attacks, and they are not consistent presently.

  • One is that universal life represents term insurance and an annuity rider, and therefore, it's not Life insurance.It doesn't qualify for 818(c) because it's not whole life; it's term insurance with an annuity.
    • This is a breakout approach, if you will.
  • Another attack is that, at the agent level, the IRS is allowing 818(c), but it is disallowing the differential between the cash value reserve and that portion of the reserve that is set up in Exhibit 8A in the U.S. annual statement as a CRVM reserve.
    • That varies by company as to whether the company tried to calculate a separate CRVM reserve and then show an excess cash value in Exhibit 8G.
  • But in that approach, the IRS is essentially allowing 818(c) but disallowing the differential between CRVM and cash value saying it's essentially a surplus reserve and not deductible.
  • When we get through with all this, I think the IRS's attack will focus on whether a product with a cash value reserve as the total reserve before segregation has a recognized preliminary term or CRVM reserving method.
  • In any event, I think you will see an attack trying to allow $0 or $5 at most, and it will probably end up in court because the dollars involved are very large.

--  Dennis Van Mieghen

1985 - SOA - United States Life Insurance Tax Law, Society of Actuaries - 58p

Legal Cases



§ 1.818–4 Election with respect to life
insurance reserves computed on
preliminary term basis.
(a) In general. Section 818(c) permits
a life insurance company issuing contracts with respect to which the life insurance reserves are computed on one
of the recognized preliminary term
bases to elect to revalue such reserves
on a net level premium basis for the
purpose of determining the amount
which may be taken into account as
life insurance reserves for purposes of
part I, subchapter L, chapter 1 of the
Code, other than section 801 (relating

  • ...considered to be provided to an employee who elects not to receive insurance unless, in order to receive the insurance, the employee is required to contribute to the cost of benefits other than term life insurance.
  • Thus, if an employee could receive term life insurance by contributing to its cost, the employee is taken into account in determining whether the insurance is provided to 10 or more employees even if such employee elects not to receive the insurance.
  • However, an employee who must contribute to the cost of permanent benefits to obtain term life insurance is not taken into account in determining whether the term life insurance is provided to 10 or more employees unless the term life insurance is actually provided to such employee.
  • (d) How much must an employee receiving permanent benefits include in income?—
  • (1) In general. If an insurance policy that meets the requirements of this section provides permanent benefits to an employee, the cost of the permanent benefits reduced by the amount paid for permanent benefits by the employee is included in the employee’s income. The cost of the permanent benefits is determined under the formula in paragraph (d)(2) of this section.
    (2) Formula for determining cost of the permanent benefits. In each policy year  the cost of the permanent benefits for any particular employee must be no less than: