3949 / How is the amount of taxable income determined when cash value insurance is provided under a qualified plan?
Only the cost of the pure amount at risk is treated as a currently taxable distribution. This cost, the amount of taxable income, is determined by applying the one year premium term rate at the insured’s age to the difference between the face amount of insurance and the cash surrender value at the end of the year.1 The applicable rate is the rate for the insured’s age on his or her birthday nearest the beginning of the policy year, although the insured’s age on his or her last birthday probably would be acceptable to the IRS, if used consistently.
For many years, P.S. 58 rates were used to calculate the value of the protection.2 The IRS, however, revoked Revenue Ruling 55-747 for most purposes.3
The manner in which the value of current life insurance provided under a qualified plan must be determined is not entirely clear. Guidance issued in 2001 and revised in 2002 provided Table 2001, which sets forth premium rates that replaced the earlier P.S. 58 Table.4 This table is reproduced in Appendix G. Table 2001 will be used until additional guidance, which was authorized by final regulations in 2003, is published in the Internal Revenue Bulletin.5