The big new federal spending package — the Consolidated Appropriations Act, 2021 (CAA 2021) package — includes a section that could change when the Internal Revenue Services classifies a financial arrangement as life insurance.
The section would replace two fixed interest rate benchmarks used in life insurance-related tax calculations with variable rates.
The change could affect whether some clients end up with big, unexpected tax bills because the IRS classifies a product that originally looked like a life insurance policy as a modified endowment contract, or as a product that qualifies for no life insurance-related tax breaks.
- A collection of documents related to the CAA 2021 spending package, including Rules Committee Print 116-68, is available here.
- An article about a health broker compensation provision is available here.
Congress added cash value accumulation standards for life insurance policies to the Internal Revenue Code in an effort to keep people from calling ordinary investment arrangements life insurance policies.
CAA 2021 drafters put the new life insurance minimum rate provision in Division EE, Title II, Section 205.
Section 205 would change the minimum interest rate used in life insurance policy cash value accumulation tests to “the applicable minimum test rate,” from 4% today.
Section 205 would also change a minimum rate used in analyzing life insurance policy premiums to an “applicable guideline premium rate,” from 6% today.