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MARCH 29, 2021 09:29 AM (EDT)

Best’s Commentary: U.S. Life Insurance Products to Change in Reaction to New Tax Rules


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FOR IMMEDIATE RELEASE

OLDWICK - MARCH 29, 2021 09:29 AM (EDT)
New interest rate assumptions for U.S. life insurance companies in the recently enacted Consolidated Appropriations Act will allow higher premiums to be paid into life products and still meet the definition of life insurance, according to a new AM Best commentary.

Two tests are used to determine if a life insurance contract meets the definition of life insurance under Section 7702 of the IRS tax code for the favorable tax treatment of cash value build-up and death benefits. These tests pertaining to cash value accumulation and guideline premium/corridor rules that aim to ensure that life insurance contracts are used for protection rather than investments. The Best’s Commentary, “U.S. Life Insurance Products to Change in Reaction to New 7702 Tax Rules,” notes that the new law sets an insurance interest rate, which will change when the reserve valuation interest rate changes and impact the testing. AM Best is of the view that the change in the interest rates used for the testing was long overdue, as these were set back in 1984 when rates were much higher. Although life insurers have had little time to react in the near term, the new law does give companies some time to prepare for when the insurance interest rate changes in the future.

Because of the new law, according to the commentary, companies are likely to start filing life insurance products with lower guarantees. Product pricing will change, particularly compensation, for universal life insurance. Most universal life commissions are paid using a target premium on which full commissions are paid, with a lower rate paid on premiums over the target premium. Target premiums may need to be adjusted due to the higher levels of premium that can be paid into the contract, while still maintaining the favorable tax status.

To access the full copy of this commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=307238 .

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.