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May You Live To 121

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Internal Revenue Service officials have proposed a safe harbor for life insurance contracts that mature after the insured attains age 100.

The IRS is seeking comments on the safe harbor proposal, and it also wants comments on the treatment of amounts received under a life insurance contract after it has matured.

The principal author of the request for comments, given in IRS Notice 2009-47, is Donald Drees.

Today, sections 7702 and 7702A of the Internal Revenue Code set rules that assume a cash-value life insurance policy will mature when the insured attains an age of 95 to 100.

Policies that fail IRS tests are treated as modified endowment contracts and no longer come under the same tax rules that apply to life insurance policies

In 2004, the National Association of Insurance Commissioners, Kansas City, Mo., made the 2001 Commissioners Standard Ordinary mortality tables the prevailing commissioners’ standard tables, officials write in the IRS notice.

“Unlike the 1958 Commissioners Standard Ordinary Mortality Tables … and the 1980 Commissioners Standard Ordinary Mortality Tables …, the 2001 CSO tables extend to age 121,” officials write. “As a result, an increasing number of issuers now develop contracts with maturity dates beyond age 100, even though the qualification of the contracts as life insurance contracts (and as MECs) is tested using computational rules that deem the contracts to mature between the date the insured attains age 95 and the date the insured attains age 100.”

A task force at the Society of Actuaries, Schaumburg, Ill., has developed recommendations for the issuers of those policies to comply with sections 7702 and 7702A in a way that is actuarially sound, officials write.

The proposed safe harbor draws on the recommendations of the SOA task force.

Under the proposed safe harbor, the IRS “would not challenge the qualification of a contract as a life insurance contract under Section 7702, or assert that a contract is a MEC under Section 7702A, provided the contract satisfies the requirements of those provisions using all of the Age 100 Testing Methodologies” described elsewhere in the safe harbor, according to the proposed text.

The proposed safe harbor then describes a series of testing methodologies.

Comments are due Oct. 13.

In a discussion of requests for comments, IRS officials ask about the tax rules that apply to individuals who already are age 100 or older who buy life insurance contracts.

“Do the computational rules of Section 7702(e) prevent the contract from qualifying as a life insurance contract for federal income tax purposes?” officials ask.

A copy of the notice is available here.


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