NU Online News Service, Dec. 2, 2003, 6:05 p.m. EST – A new Internal Revenue Service ruling could change the amount of taxes that some life insurers pay on interest income.[@@]
A life insurer must pay federal income taxes on its own interest earnings, but the insurer can exclude policyholders’ interest earnings from taxable income.
When a life insurer is separating its own share of interest income from policyholders’ share, it computes the minimum amount of interest that state and federal laws require it to pay to policyholders. The insurer can deduct that amount, along with other amounts, from its own share of interest income.
Up till now, the Internal Revenue Code has not said whether a life insurer should compute the legally required interest payments using the amount of reserves it holds at the beginning of the tax year, the amount it holds at the end of the tax year, or some other figure.
The new ruling, Revenue Ruling 2003-120, holds that a life insurer should get the reserve figure used in the computation by adding the reserve figure for the beginning of the tax year to the reserve figure for the end of the year, then dividing by two.