[Federal Register Volume 70, Number 99 (Tuesday, May 24, 2005)]
[Proposed Rules]
[Pages 29671-29675]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-10166]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-168892-03]
RIN 1545-BD00


Attained Age of the Insured Under Section 7702

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations explaining how to 
determine the attained age of an insured for purposes of testing 
whether a contract qualifies as a life insurance contract for Federal 
income tax purposes. This document also provides notice of a public 
hearing on these proposed regulations.

DATES: Written or electronic comments must be received by August 24, 
2005. Requests to speak and outlines of topics to be discussed at the 
public hearing scheduled for Wednesday, September 14, 2005, must be 
received by August 24, 2005.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-168892-03), room 
5203, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Comments may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
168892-03), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or submitted to the IRS Web site at http://www.irs.gov/regs or via the Federal eRulemaking Portal at http://www.regulations.gov (IRS-REG-168892-03). All comments will be available 
for public inspection and copying. Requests to speak, with outlines of 
topics to be discussed, at the hearing scheduled for September 14, 
2005, at 10 a.m., must be received by August 24, 2005. The public 
hearing will be held in the IRS Auditorium (7th Floor), Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Ann H. 
Logan, (202) 622-3970. Concerning submission of comments, the hearing, 
or to be placed on the building access list to attend the hearing, 
Lanita Van Dyke of the Publication and Regulations Branch, (202) 622-
7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 7702(a) of the Internal Revenue Code (Code) provides that, 
for a contract to qualify as a life insurance contract for Federal 
income tax purposes, the contract must be a life insurance contract 
under the applicable law and must either (1) satisfy the cash value 
accumulation test of section 7702(b), or (2) both meet the guideline 
premium requirements of section 7702(c) and fall within the cash value 
corridor of section 7702(d). To determine whether a contract satisfies 
the cash value accumulation test, or meets the guideline premium 
requirements and falls within the cash value corridor, it is necessary 
to determine the attained age of the insured.
    A contract meets the cash value accumulation test of section 
7702(b) if, by the terms of the contract, the cash surrender value of 
the contract may not at any time exceed the net single premium that 
would have to be paid at that time to fund future benefits under the 
contract. Under section 7702(e)(1)(B), the maturity date of the 
contract is deemed to be no earlier than the day on which the insured 
attains age 95, and no later than the day on which the insured attains 
age 100, for purposes of applying the cash value accumulation test.
    A contract meets the guideline premium requirements of section 
7702(c) if the sum of the premiums paid under the contract does not at 
any time exceed the greater of the guideline single premium or the sum 
of the guideline level premiums as of such time. The guideline single 
premium is the premium that is needed at the time the policy is issued 
to fund the future benefits under the contract based on the following 
three elements enumerated in section 7702(c)(3)(B):
    (i) Reasonable mortality charges that meet the requirements (if 
any) prescribed in regulations and that (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;

[[Page 29672]]

    (ii) Any reasonable charges (other than mortality charges) that (on 
the basis of the company's experience, if any, with respect to similar 
contracts) are reasonably expected to be actually paid; and
    (iii) Interest at the greater of an annual effective rate of six 
percent or the rate or rates guaranteed on issuance of the contract.
    The guideline level premium is the level annual amount, payable 
over a period not ending before the insured attains age 95, computed on 
the same basis but using a minimum interest rate of four percent, 
rather than six percent. Like the cash value accumulation test, the 
guideline premium requirements are applied by deeming the maturity date 
of the contract to be no earlier than the day on which the insured 
attains age 95, and no later than the day on which the insured attains 
age 100. The deemed maturity date generally is the determination date 
set forth in the contract or the end of the mortality table (which, 
when section 7702 was enacted in 1984, was age 100).
    A contract falls within the cash value corridor if the death 
benefit of the contract at any time is not less than the applicable 
percentage of the cash surrender value. The applicable percentage is 
determined based on the attained age of the insured as of the beginning 
of the contract year, as follows:

                          Applicable Percentage
------------------------------------------------------------------------
  In the case of an insured with an     The applicable percentage shall
attained age as of the the beginning   decrease by a ratable portion for
      of the contract year of:                  each full year:
------------------------------------------------------------------------
                      But not more
    More than:           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
------------------------------------------------------------------------

    The Code does not define the attained age of the insured for 
purposes of applying the cash value corridor, the guideline premium 
limitations, and the computational rules of section 7702(e). The Senate 
Finance Committee explanation of the Deficit Reduction Act of 1984, 
Public Law 98-369 (98 Stat. 494), however, states that the attained age 
of the insured means the insured's age determined by reference to 
contract anniversaries (rather than the individual's actual birthdays), 
so long as the age assumed under the contract is within 12 months of 
the actual age. See S. Prt. No. 98-169, Vol. 1, at 576 (1984).
    Section 7702A defines a modified endowment contract as a contract 
that meets the requirements of section 7702 (that is, a contract that 
is a life insurance contract), but that fails to meet the 7-pay test 
set forth in section 7702A(b). A contract fails to meet the 7-pay test 
if the accumulated amount paid under the contract at any time during 
the first 7 contract years exceeds the sum of the net level premiums 
that would have been paid on or before that time if the contract 
provided for paid-up future benefits after the payment of 7 level 
annual premiums. Section 7702A(c)(1)(B) provides that, for purposes of 
this test, the computational rules of section 7702(e) generally apply, 
including the contract's deemed maturity no earlier than the day on 
which the insured attains age 95, and no later than the day on which 
the insured attains age 100.
    In sum, the attained age of an insured under a contract that is a 
life insurance contract under the applicable law must be determined to 
test whether the contract complies with the guideline premium 
requirements of section 7702(c), the cash value corridor of section 
7702(d), and (by reason of the computational rules of section 7702(e)) 
the cash value accumulation test of section 7702(b) and the 7-pay test 
of section 7702A(b), as applicable.

Discussion

    Although most life insurance contracts insure the life of one 
person, some life insurance contracts insure multiple lives. For 
example, a last-to-die life insurance contract (sometimes referred to 
as a survivorship or second-to-die life insurance contract) insures two 
or more lives and pays death benefits when the last insured dies. Such 
contracts are sometimes used in connection with business continuation 
or estate tax planning; the contracts typically involve lower premiums 
than do contracts insuring a single life.
    A first-to-die life insurance contract (sometimes referred to as a 
joint life insurance contract) also insures two or more lives, but pays 
death benefits and terminates upon the death of the first insured. 
These contracts typically involve higher risks and thus higher premiums 
than do contracts insuring a single life. First-to-die life insurance 
contracts represent a small percentage of the multiple-life insurance 
contracts that are issued.
    Section 7702A, which defines the term modified endowment contract 
(MEC), incorporates the computational rules of section 7702, both in 
its initial determination of whether a contract is a life insurance 
contract, and in its 7-pay test calculations. Further, section 
7702A(c)(6) provides a specific computational rule that applies to 
multiple life insurance contracts if the death benefit under the 
contract is reduced.
    Neither section 7702, section 7702A, nor the legislative history of 
either provision, addresses how an insured's attained age is determined 
for purposes of testing a life insurance contract insuring multiple 
lives under the cash value accumulation test of section 7702(b), the 
guideline premium requirements of section 7702(c), or the computational 
rules of section 7702(e).

Explanation of Provision

    This document contains proposed amendments to 26 CFR part 1 under 
section 7702. The proposed regulations provide guidance on how to 
determine the attained age of an insured individual under a contract 
that is a life insurance contract under the applicable law, for 
purposes of testing whether the contract

[[Page 29673]]

qualifies as a life insurance contract under section 7702 and is a MEC 
under section 7702A. Under the proposed regulations, the attained age 
of the insured under a contract insuring the life of a single 
individual is either (i) the insured's age determined by reference to 
the individual's actual birthday as of the date of determination 
(actual age) or (ii) the insured's age determined by reference to 
contract anniversary (rather than the individual's actual birthday), so 
long as the age assumed under the contract (contract age) is within 12 
months of the actual age. The attained age of the insured under a 
contract insuring multiple lives on a last-to-die basis is the attained 
age of the youngest insured. The attained age of the insured under a 
contract insuring multiple lives on a first-to-die basis is the 
attained age of the oldest insured. The Treasury Department and the IRS 
understand that the approach of the proposed regulations is consistent 
with the existing practice of many (but not all) issuers of both 
contracts insuring a single life and contracts insuring multiple lives. 
In addition, by mandating the use of a single, predictable age, the 
proposed regulations provide rules that are straightforward for both 
issuers and the IRS to administer.
    The proposed regulations generally would be applicable for 
contracts issued on or after the date that is one year after the 
regulations are published as final regulations in the Federal Register. 
This applicability date recognizes that some issuers will need time to 
conform their compliance system to the proposed standard for the 
issuance of new contracts, to file policy forms with State authorities, 
or both. Taxpayers also would be permitted to apply the regulations 
retroactively for contracts issued before the date that is one year 
after the regulations are published as final regulations, provided they 
do not later determine qualification of those contracts under section 
7702 in a manner inconsistent with the regulations.
    The proposed regulations defining the attained age for purposes of 
these provisions are not intended to specify which multiple-life 
actuarial methodologies are appropriate to determine reasonable 
mortality charges under sections 7702 and 7702A, or how any such 
methodology should be applied.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are timely submitted to the 
IRS. In addition to comments on the proposed regulations more 
generally, the IRS and Treasury Department specifically request 
comments on (i) the clarity of the proposed regulations and how they 
can be made easier to understand, (ii) the industry's existing practice 
for determining the attained age to use under both last-to-die and 
first-to-die life insurance contracts, (iii) the need for special rules 
for determining the attained age of one or more insureds to calculate 
mortality charges under section 7702(c)(3)(B)(i), and (iv) the 
effective date of the proposed regulations. All comments will be 
available for public inspection and copying.
    A public hearing has been scheduled for September 14, 2005, at 10 
a.m., in the IRS Auditorium (7th Floor), Internal Revenue Building, 
1111 Constitution Avenue, NW., Washington, DC. All visitors must 
present a photo identification to enter the building. Because of access 
restrictions, visitors must use the Constitution Avenue entrance and 
will not be admitted beyond the Internal Revenue Building lobby more 
than 30 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons who wish to present oral comments at the hearing must 
submit written comments by August 24, 2005, and submit an outline of 
the topics to be discussed and the time to be devoted to each topic (a 
signed original and eight (8) copies) by that same date.
    A period of 10 minutes will be allotted to each person(s) for 
making comments. An agenda showing the scheduling of the speakers will 
be prepared after the deadline for receiving outlines has passed. 
Copies of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Ann H. Logan, 
Office of the Associate Chief Counsel (Financial Institutions and 
Products), Office of Chief Counsel, Internal Revenue Service. However, 
personnel from other offices of the IRS and the Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income Taxes.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.7702-2 also issued under 26 U.S.C. 7702(k). * * *

    Par. 2. Section 1.7702-0, proposed to be added at 56 FR 30720 and 
published on July 5, 1991, and further proposed to be amended at 57 FR 
59321 and published December 15, 1992, is further proposed to be 
revised to read as follows:


Sec.  1.7702-0  Table of contents.

    This section lists the captions that appear in Sec. Sec.  1.7702-1, 
1.7702-2, and 1.7702-3:

Sec.  1.7702-1 Mortality charges.

(a) General rule.
(b) Reasonable mortality charges.
(1) Actually expected to be imposed.
(2) Limit on charges.
(c) Safe harbors.
(1) 1980 C.S.O. Basic Mortality Tables.
(2) Unisex tables and smoker/nonsmoker tables.
(3) Certain contracts based on 1958 C.S.O. table.
(d) Definitions.
(1) Prevailing commissioners' standard tables.
(2) Substandard risk.
(3) Nonparticipating contract.
(4) Charge reduction mechanism.
(5) Plan of insurance.
(e) Effective date.

Sec.  1.7702-2 Definitions.

(a) In general.
(b) Cash value.

[[Page 29674]]

(1) In general.
(2) Amounts excluded from cash value.
(c) Death benefit.
(1) In general.
(2) Qualified accelerated death benefit treated as death benefit.
(d) Qualified accelerated death benefit.
(1) In general.
(2) Determination of present value of the reduction in death 
benefit.
(3) Examples.
(e) Terminally ill defined.
(f) Certain other additional benefits.
(1) In general.
(2) Examples.
(g) Adjustments under section 7702(f)(7)
(h) Cash surrender value.
(1) In general.
(2) For purposes of section 7702(f)(7)
(i) Net surrender value.
(j) Effective date and special rules.
(1) In general.
(2) Provision of certain benefits before July 1, 1993.
(i) Not treated as cash value.
(ii) No effect on date of issuance.
(iii) Special rule for addition of benefit or loan provision after 
December 15, 1992.
(3) Addition of qualified accelerated death benefit.
(4) Addition of other additional benefits.

Sec.  1.7702-3 Attained age of the insured under a life insurance 
contract.

(a) In general.
(b) Contract insuring a single life.
(c) Contract insuring multiple lives on a last-to-die basis.
(d) Contract insuring multiple lives on a first-to-die basis.
(e) Examples.
(f) Effective dates.
(1) In general.
(2) Contracts issued before the general effective date.

    Par. 3. Section 1.7702-3 is added to read as follows:


Sec.  1.7702-3  Attained age of the insured under a life insurance 
contract.

    (a) In general. This section provides guidance on determining the 
attained age of an insured under a contract that is a life insurance 
contract under the applicable law, for purposes of testing whether the 
contract complies with the guideline premium requirements of section 
7702(c), the cash value corridor of section 7702(d), and the 
computational rules of section 7702(e), as applicable.
    (b) Contract insuring a single life. (1) If a contract insures the 
life of a single individual, either of the following two ages may be 
treated as the attained age of the insured with respect to that 
contract--
    (i) The insured's age determined by reference to the individual's 
actual birthday as of the date of determination (actual age); or
    (ii) The insured's age determined by reference to contract 
anniversary (rather than the individual's actual birthday), so long as 
the age assumed under the contract (contract age) is within 12 months 
of the actual age.
    (2) Whichever attained age is used with respect to a contract must 
be used consistently from year to year and consistently for purposes of 
sections 7702(c), 7702(d), and 7702(e), as applicable.
    (c) Contract insuring multiple lives on a last-to-die basis. If a 
contract insures the lives of more than one individual on a last-to-die 
basis, the attained age of the insured is determined by applying 
paragraph (b) of this section as if the youngest individual were the 
only insured under the contract.
    (d) Contract insuring multiple lives on a first-to-die basis. If a 
contract insures the lives of more than one individual on a first-to-
die basis, the attained age of the insured is determined by applying 
paragraph (b) of this section as if the oldest individual were the only 
insured under the contract.
    (e) Examples. The following examples illustrate the determination 
of the attained age of the insured for purposes of testing whether the 
contract complies with the guideline premium requirements of section 
7702(c), the cash value corridor of section 7702(d), and the 
computational rules of section 7702(e), as applicable. The examples are 
as follows:

    Example 1. (i) X was born on May 1, 1947. On January 1, 2008, X 
purchases from IC a contract insuring X's life. January 1 is the 
contract anniversary date for all future years. Under the contract, 
X's premiums are determined on an age-last-birthday basis. X became 
60 years old on May 1, 2007. Based on the method used under the 
contract to determine age, X has an attained age of 60 for the first 
contract year, 61 for the second contract year, and so on.
    (ii) Section 1.7702-3(b) provides that, if a contract insures 
the life of a single individual, the insured's age may be determined 
by reference to contract anniversary (rather than the individual's 
actual birthday), so long as the contract age is within 12 months of 
the actual age. For each contract year, X's contract age, determined 
on an age-last-birthday basis, is within 12 months of X's actual 
age. Accordingly, provided it does so consistently from year to 
year, IC may compute X's attained age on an age-last-birthday basis 
for purposes of testing whether a contract complies with the 
guideline premium requirements of section 7702(c), the cash value 
corridor of section 7702(d), and the computational rules of section 
7702(e), as applicable.
    Example 2. (i) The facts are the same as in Example 1 except 
that, under the contract, X's premiums are determined on an age-
nearest-birthday basis. X's nearest birthday to January 1, 2008, is 
May 1, 2008, when X will become 61 years old. Based on the method 
used under the contract to determine age, X has an attained age of 
61 for the first contract year, 62 for the second contract year, and 
so on.
    (ii) Section 1.7702-3(b) provides that, if a life insurance 
contract insures the life of a single individual, the insured's age 
may be determined by reference to contract anniversary (rather than 
the individual's actual birthday), so long as the contract age is 
within 12 months of the actual age. For each contract year, X's 
contract age, determined on an age-nearest-birthday basis, is within 
12 months of X's actual age. Accordingly, provided it does so 
consistently from year to year, IC may compute X's attained age on 
an age-nearest-birthday basis for purposes of testing whether the 
contract complies with the guideline premium requirements of section 
7702(c), the cash value corridor of section 7702(d), and the 
computational rules of section 7702(e), as applicable.

    Example 3. (i) The facts are the same as in Example 1 except 
that in addition to X, the insurance contract also insures the life 
of Y. Y was born on September 1, 1942. The death benefit will be 
paid when the last of the two insureds dies.
    (ii) Section 1.7702-3(c) provides that if a life insurance 
contract insures the lives of more than one individual on a last-to-
die basis, the attained age of the insured is determined by applying 
Sec.  1.7702-3(b) as if the youngest individual were the only 
insured under the contract. Because X is younger than Y, the 
attained age of X must be used for purposes of testing whether the 
contract complies with the guideline premium requirements of section 
7702(c), the cash value corridor of section 7702(d), and the 
computational rules of section 7702(e), as applicable. The attained 
ages of X and Y are determined as set forth in Example 1.

    Example 4. (i) The facts are the same as Example 1 except that 
in addition to X, the insurance contract also insures the life of Y. 
Y was born on September 1, 1952. The death benefit will be paid when 
the first of the two insureds dies.
    (ii) Section 1.7702-3(d) provides that if a life insurance 
contract insures the lives of more than one individual on a first-
to-die basis, the attained age of the insured is determined by 
applying Sec.  1.7702-3(b) as if the oldest individual were the only 
insured under the contract. Because X is older than Y, the attained 
age of X must be used for purposes of testing whether the contract 
complies with the guideline premium requirements of section 7702(c), 
the cash value corridor of section 7702(d), and the computational 
rules of section 7702(e), as applicable. The attained ages of X and 
Y are determined as set forth in Example 1.

    (f) Effective dates--(1) In general. Except as provided in 
paragraph (f)(2), these regulations apply to contracts issued on or 
after the date that is one year after the regulations are published as 
final regulations in the Federal Register.
    (2) Retroactive application. Pursuant to section 7805(b)(7), a 
taxpayer may

[[Page 29675]]

elect to apply these regulations retroactively for contracts issued 
before the date that is one year after the regulations are published as 
final regulations in the Federal Register, provided that the taxpayer 
does not later determine qualification of those contracts in a manner 
that is inconsistent with these regulations.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-10166 Filed 5-20-05; 8:45 am]
BILLING CODE 4830-01-P