<Bonk: Does "other than term" mean "permanent"?>
§ 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
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."
-- WILLIAM B. HARMAN, JR
1981, Universal Life, Society of Actuaries
Section 818(c) of the Income Tax Act also offers many companies financial incentive for holding CRVM rather than net level reserves.
-- JOHN C. ANGLE:
1980, NONFORFEITURE AND VALUATION CONCERNS IN THE 1980'S, Society of Actuaries
1985 VOL. 11 NO. 3
UNITED STATES LIFE INSURANCE TAX LAW
1989 VOL. 15 NO. 2
NEW TAX DEVELOPMENTS, AUDIT ISSUES
AND ALTERNATE MINIMUM TAX
Taxing Times, September 2007, Volume 3, Issue No. 3
For example, section 818(c), enacted in the 1959 Act,
sidered 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
(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
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.
-- MR. DENNIS VAN MIEGHEN
1985 - UNITED STATES LIFE INSURANCE TAX LAW, Society of Actuaries - 58p