Insurers can assign the same life insurance policyholder different ages when determining policy mortality charges and making level-premium or cash value corridor computations.
Officials at the Internal Revenue Service have offered that advice in the preamble to a new final rule, “Attained Age of the Insured Under Section 7702,” which appears today in the Federal Register.
The IRS developed the final rule, which is based on a proposed rule released in June 2005, to explain how to determine the “attained age” of an insured for purposes of testing whether a life insurance contract qualifies as a life insurance contract for federal income tax purposes,
Under Section 7702(a) of the Internal Revenue Code, a contract must meet a cash value accumulation test or else meet both premium guideline requirements and requirements that set cash value minimums and maximums.
The computations depend in part on when the attained age of the insured reaches age 95 and age 100.
Under the proposed regulations, an individual insured’s attained age could be the insured’s actual birthday or the insured’s age on the contract anniversary.
For a “last-to-die” policy, the attained age of the insured would be the attained age of the youngest insured.
For a “first-to-die” policy, the attained age of the insured would be the attained age of the oldest insured, officials say.
The one party that commented on the proposed regulation suggested that taxpayers should take into account the age of the youngest surviving insured, rather than the initial youngest insured, if the initial youngest insured dies and the policy cash value and mortality charges change.
The IRS took that advice and incorporated the changes in the final regulations, officials say.
The commenter also asked the IRS to recognize that some life insurers add years to the actual age of an insured in poor health to reflect the fact that the insured has a relatively short life expectancy.
The IRS should let taxpayers treat the insured’s “derived age” as the attained age in these circumstances, the commenter said.
The IRS decided against making the proposed change.
Taxpayers can cope by using separate rules to use the insured’s age in determining reasonable mortality charges and in making level-premium and cash value corridor calculations, IRS officials write in the final rule preamble.
“The final regulations do not, nor or they intended to, endorse or prohibit any methodology for determining reasonable mortality charges,” officials write.
But IRS officials did take the advice of the commenter and coordinate implementation schedules to coordinate with states’ adoption of the 2001 Commissioners Standard Ordinary mortality tables.
The final rule now applies to life insurance contracts that are issued after Dec. 31, 2008, or issued on or after Oct. 1, 2007, and based on the 2001 CSO tables, officials write.
A copy of the attained age final rule is on the Web at Document Link