Life insurance contract defined

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 the cash value accumulation test, the death benefit increases may be taken into account if the 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— 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— in the case of a contract to which subsection (a)(1) applies, the excess of— in the case of a contract to which subsection (a)(2) applies, the greater of— 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— 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— the sum 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.