Attained Age of the Insured Under Section 7702, 53967-53971 [E6-15117]
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Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Rules and Regulations
Register on Monday, July 31, 2006 (71
FR 43056) providing guidance regarding
employer comparable contributions to
Health Savings Accounts (HSAs) under
section 4980G.
DATES: These corrections are effective
July 31, 2006.
FOR FURTHER INFORMATION CONTACT:
Mireille T. Khoury, (202) 622–6080 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The correction notice that is the
subject of this document is under
section 4980G of the Internal Revenue
Code.
Need for Correction
As published, the final regulations
(TD 9277) contain errors that may prove
to be misleading and are in need of
clarification.
List of Subjects in 26 CFR Part 54
§ 54.4980G–5 HSA comparability rules and
cafeteria plans and waiver of excise tax.
*
*
*
*
*
Q–3: If under the employer’s cafeteria
plan, employees who are eligible
individuals and who participate in
health assessments, disease
management programs or wellness
programs receive an employer
contribution to an HSA and the
employees have the right to elect to
make pre-tax salary reduction
contributions to their HSAs, are the
contributions subject to the
comparability rules?
*
*
*
*
*
I Par. 3. Section 54.4980G–4 is
corrected by:
I 1. Revising A–2 paragraph (c)
Example 2.
I 2. Revising A–2 paragraph (e)
Example 1.
§ 54.4980G–4 Calculating comparable
contributions.
Excise taxes, Pensions, Reporting and
recordkeeping requirements.
*
Correction of Publication
Example 2. In a calendar year, Employer J
offers its employees an HDHP and
contributes on a monthly pay-as-you-go basis
to the HSAs of employees who are eligible
individuals with coverage under Employer J’s
HDHP. In the calendar year, Employer J
contributes $50 per month to the HSA of
each employee with self-only HDHP coverage
and $100 per month to the HSA of each
employee with family HDHP coverage. From
January 1st through March 31st of the
calendar year, Employee X is an eligible
individual with self-only HDHP coverage.
From April 1st through December 31st of the
calendar year, X is an eligible individual
with family HDHP coverage. For the months
of January, February and March of the
calendar year, Employer J contributes $50 per
month to X’s HSA. For the remaining months
of the calendar year, Employer J contributes
$100 per month to X’s HSA. Employer J’s
contributions to X’s HSA satisfy the
comparibility rules.
Accordingly, 26 CFR part 54 is
corrected by making the following
correcting amendments:
I
PART 54—PENSION EXCISE TAXES
Paragraph 1. The authority citation
for part 54 continues to read, in part, as
follows:
I
Authority: 26 U.S.C. 7805 * * *
I Par. 2. Section 54.4980G–0 is
corrected by:
I 1. Revising the entries for 54.4980G–
4 Q–5 and Q–11.
I 2. Revising the entries for 54.4980G–
5 Q–3.
§ 54.4980G–0
*
*
*
Table of contents.
*
*
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*
*
*
*
Q–5: Must an employer use the same
contribution method as described in Q
& A–2 and Q & A–4 of this section for
all employees for any month during the
calendar year?
*
*
*
*
*
Q–11: If an employer makes
additional contributions to the HSAs of
all comparable participating employees
who are eligible to make the additional
contributions (HSA catch-up
contributions) under section 223(b)(3),
do the contributions satisfy the
comparability rules?
*
*
*
*
*
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*
*
(d) * * *
(e) * * *
§ 54.4980G–4 Calculating comparable
contributions.
*
*
*
A–2: * * *
(c) * * *
Example 1. In a calendar year, Employer K
offers its employees an HDHP and
contributes on a look-back basis to the HSAs
of employees who are eligible individuals
with coverage under Employer K’s HDHP.
Employer K contributes $600 ($50 per
month) for the calendar year to the HSA of
each employee with self-only HDHP coverage
and $1,200 ($100 per month) for the calendar
year to the HSA of each employee with
family HDHP coverage. From January 1st
through June 30th of the calendar year,
Employee Y is an eligible individual with
family HDHP coverage. From July 1st through
December 31st, Y is an eligible individual
with self-only HDHP coverage. Employer K
contributes $900 on a look-back basis for the
calendar year to Y’s HSA ($100) per month
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53967
for the months of January through June and
$50 per month for the months of July through
December. Employer K’s contributions to Y’s
HSA satisfy the comparability rules.
*
*
*
*
*
Guy R. Traynor,
Chief, Publications and Regulations Branch,
Legal Processing Division, Associate Chief
Counsel (Procedure and Administration).
[FR Doc. E6–15125 Filed 9–12–06; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9287]
RIN 1545–BE53
Attained Age of the Insured Under
Section 7702
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulation.
AGENCY:
SUMMARY: This document contains final
regulations explaining how to determine
the attained age of an insured for
purposes of testing whether a contract
qualifies as a life insurance contract for
Federal income tax purposes.
DATES: Effective Date: These regulations
are effective September 13, 2006.
Applicability Dates: For dates of
applicability, see § 1.7702–2(f).
FOR FURTHER INFORMATION CONTACT: Ann
H. Logan, 202–622–3970 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
Section 7702(a) of the Internal
Revenue Code (Code) provides that, for
a contract to qualify as a life insurance
contract for Federal income tax
purposes, the contract must be a life
insurance contract under the applicable
law and must either (1) Satisfy the cash
value accumulation test of section
7702(b), or (2) both meet the guideline
premium requirements of section
7702(c) and fall within the cash value
corridor of section 7702(d). To
determine whether a contract satisfies
the cash value accumulation test, or
meets the guideline premium
requirements and falls within the cash
value corridor, it is necessary to
determine the attained age of the
insured.
A contract meets the cash value
accumulation test of section 7702(b) if,
by the terms of the contract, the cash
surrender value of the contract may not
at any time exceed the net single
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premium that would have to be paid at
that time to fund future benefits under
the contract. Under section
7702(e)(1)(B), the maturity date of the
contract is deemed to be no earlier than
the day on which the insured attains age
95, and no later than the day on which
the insured attains age 100, for purposes
of applying the cash value accumulation
test.
A contract meets the guideline
premium requirements of section
7702(c) if the sum of the premiums paid
under the contract does not at any time
exceed the greater of the guideline
single premium or the sum of the
guideline level premiums as of such
time. The guideline single premium is
the premium that is needed at the time
the policy is issued to fund the future
benefits under the contract based on the
following three elements enumerated in
section 7702(c)(3)(B):
(i) Reasonable mortality charges that
meet the requirements (if any)
prescribed in regulations and that
(except as provided in regulations) do
not exceed the mortality charges
specified in the prevailing
commissioners’ standard tables (as
defined in section 807(d)(5)) as of the
time the contract is issued;
(ii) Any reasonable charges (other
than mortality charges) that (on the
basis of the company’s experience, if
any, with respect to similar contracts)
are reasonably expected to be actually
paid; and
(iii) Interest at the greater of an annual
effective rate of six percent or the rate
or rates guaranteed on issuance of the
contract.
The guideline level premium is the
level annual amount, payable over a
period not ending before the insured
attains age 95, computed on the same
basis as the guideline single premium
but using a minimum interest rate of
four percent, rather than six percent.
Like the cash value accumulation test,
the guideline premium requirements are
applied by deeming the maturity date of
the contract to be no earlier than the day
on which the insured attains age 95, and
no later than the day on which the
insured attains age 100. The deemed
maturity date generally is the
determination date set forth in the
contract or the end of the mortality table
(which, when section 7702 was enacted
in 1984, was age 100).
A contract falls within the cash value
corridor if the death benefit of the
contract at any time is not less than the
applicable percentage of the cash
surrender value. The applicable
percentage is determined based on the
attained age of the insured as of the
beginning of the contract year, as
follows:
APPLICABLE PERCENTAGE
In the case of an insured with an attained age as of the beginning of the contract year of:
But not more
than:
More than:
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0 ...................................................................................................................................................
40 .................................................................................................................................................
45 .................................................................................................................................................
50 .................................................................................................................................................
55 .................................................................................................................................................
60 .................................................................................................................................................
65 .................................................................................................................................................
70 .................................................................................................................................................
75 .................................................................................................................................................
90 .................................................................................................................................................
The Code does not define the attained
age of the insured for purposes of
applying the cash value corridor, the
guideline premium limitations, or the
computational rules of section 7702(e).
The Senate Finance Committee
explanation of the Deficit Reduction Act
of 1984, Public Law 98–369 (98 Stat.
494), however, states that the attained
age of the insured means the insured’s
age determined by reference to contract
anniversaries (rather than the
individual’s actual birthdays), so long as
the age assumed under the contract is
within 12 months of the actual age. See
S. Prt. No. 98–169, Vol. 1, at 576 (1984).
Section 7702A defines a modified
endowment contract (MEC) as a contract
that meets the requirements of section
7702 (that is, a contract that is a life
insurance contract), but that fails to
meet the 7-pay test set forth in section
7702A(b). A contract fails to meet the 7pay test if the accumulated amount paid
under the contract at any time during
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the first 7 contract years exceeds the
sum of the net level premiums that
would have been paid on or before that
time if the contract provided for paidup future benefits after the payment of
7 level annual premiums. Section
7702A(c)(1)(B) provides that, for
purposes of this test, the computational
rules of section 7702(e) generally apply,
including the contract’s deemed
maturity no earlier than the day on
which the insured attains age 95, and no
later than the day on which the insured
attains age 100.
In sum, the attained age of an insured
under a contract that is a life insurance
contract under the applicable law must
be determined to test whether the
contract complies with the guideline
premium requirements of section
7702(c), the cash value corridor of
section 7702(d), and (by reason of the
computational rules of section 7702(e))
the cash value accumulation test of
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40
45
50
55
60
65
70
75
90
95
The applicable percentage
shall decrease by a ratable
portion for each full year:
From:
To:
250
250
215
185
150
130
120
115
105
105
250
215
185
150
130
120
115
105
105
100
section 7702(b) and the 7-pay test of
section 7702A(b), as applicable.
On May 24, 2005, the IRS and
Treasury Department published a notice
of proposed rulemaking (REG–168892–
03), (2005–25 I.R.B. 1293, June 20, 2005)
in the Federal Register (70 FR 29671)
(the proposed regulations). The
proposed regulations provide guidance
on how to determine the attained age of
an individual insured under a contract
that is a life insurance contract under
the applicable law, for purposes of
testing whether the contract qualifies as
a life insurance contract under section
7702 and is a modified endowment
contract under section 7702A. Under
the proposed regulations, the attained
age of the insured is either (i) The
insured’s age determined by reference to
the individual’s actual birthday as of the
date of determination (actual age) or (ii)
the insured’s age determined by
reference to contract anniversary (rather
than the individual’s actual birthday),
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so long as the age assumed under the
contract (contract age) is within 12
months of the actual age. The proposed
regulations provide that the attained age
of the insured under a contract insuring
multiple lives on a last-to-die basis is
the attained age of the youngest insured,
and the attained age of the insured
under a contract insuring multiple lives
on a first-to-die basis is the attained age
of the oldest insured.
The sole party requesting a public
hearing timely withdrew its request.
One written comment regarding the
notice of proposed rulemaking was
received.
Explanation of Provisions
After consideration of the written
comment received, this Treasury
decision adopts the regulations as
proposed, with the modifications noted
below.
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A. Identity of the Insured Individual
The proposed regulations provide
that, in the case of a last-to-die contract,
the attained age of the insured means
the age of the youngest individual
insured under the contract. The
comment letter pointed out that, in the
case of such a contract, the death of the
youngest insured raises a question
whether the attained age under the
contract should continue to be
determined based on the attained age of
the deceased insured, or should instead
be based on the attained age of the
youngest surviving insured. Some lastto-die life insurance contracts undergo a
change in both cash value and future
mortality charges as a result of the death
of an insured. These changes take into
account the identity of the surviving
insured or insureds. Other last-to-die
life insurance contracts treat the death
of an insured as a non-event for
purposes of measuring cash value and
future mortality charges under the
contract. The comment letter suggested
a rule for last-to-die contracts that
would take into account the age of the
youngest surviving insured if the
contract undergoes modifications to
both the cash value and future mortality
charges under the contract, so that the
attained age assumptions used for
Federal income tax purposes are
consistent with those used under the
terms of the contract. The final
regulations include such a rule in
§ 1.7702–2(c)(2).
B. Changes in Benefits Between Policy
Anniversaries
The proposed regulations provide that
the age of an individual insured under
a life insurance contract is either (i) The
insured’s age determined by reference to
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the individual’s actual birthday as of the
date of determination (actual age), or (ii)
the insured’s age determined by
reference to contract anniversary (rather
than the individual’s actual birthday),
so long as the age assumed under the
contract (contract age) is within 12
months of the actual age. The proposed
regulations do not, however, define the
attained age to be used if there is an
increase in death benefits between
policy anniversary dates. Specifically,
should the attained age as of the
beginning of the contract year continue
to be used at the time of the benefit
increase, even if the date of change is
closer to the next contract anniversary?
The comment letter requests flexibility
to use the attained age as of either the
previous or subsequent policy
anniversary, or any age between those
two ages. The final regulations address
this issue by clarifying that the attained
age of the insured under a contract, once
determined, changes annually. This rule
is set forth in § 1.7702–2(b)(2).
C. Use of Derived Ages for Multiple Life
Contracts
Under the proposed regulations, the
attained age of the insured under a
contract insuring multiple lives is either
the attained age of the youngest insured
(in the case of a last-to-die contract) or
the attained age of the oldest insured (in
the case of a first-to-die contract). Some
issuers, however, determine mortality
charges under such contracts using a
single, derived age that does not
correspond to the attained age of any
single insured under the contract. In
addition, in some cases issuers currently
account for substandard risks by
determining mortality charges based on
an age that is older than the actual
attained age of the insured under the
contract. The comment letter requested
a rule that would permit the use of the
same derived age as the attained age of
the insured in these circumstances, to
avoid whatever administrative
complexities could result from the use
of different ages for different purposes
in the course of testing compliance of
the contracts with sections 7702 and
7702A.
The final regulations do not make this
change. The manner in which age is
used to determine reasonable mortality
charges under section 7702(c)(3)(B)(i) is
independent of the age that is treated as
the attained age of the insured for
purposes of determining the guideline
level premium under section 7702(c)(4),
or applying the cash value corridor of
section 7702(d) or the computational
rules of section 7702(e). The final
regulations do not, nor are they
intended to, endorse or prohibit any
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53969
methodology for determining reasonable
mortality charges under section 7702(c).
Reasonable mortality charges were the
subject of regulations proposed July 5,
1991, (FI–069–89) (1991–2 C.B. 963) in
the Federal Register (56 FR 30718), and
also were addressed in Notice 88–128,
1988–2 C.B. 540, and Notice 2004–61,
2004–2 C.B. 596. See § 601.601(d)(2)(ii).
This prior guidance is not modified,
clarified, or in any other way affected by
these final regulations.
D. Contract Anniversary
The comment letter requested that the
regulations include a definition of
contract anniversary other than the
issue date of the contract and
subsequent anniversaries of that date.
The final regulations do not include
such a definition because the terms
issue date and contract year have broad
application, and it would be
inappropriate to address the matter for
the first time in these final regulations.
E. Effective Date
The proposed regulations were
proposed to apply to contracts issued on
or after the date that is one year after the
regulations are published as final
regulations in the Federal Register. A
taxpayer would be permitted, however,
to apply these final regulations
retroactively for contracts issued before
that date provided the taxpayer does not
later determine qualification of those
contracts in a manner that is
inconsistent with these regulations.
The comment letter requested that the
final regulations conform more closely
to the adoption dates for the 2001
Commissioners’ Standard Ordinary
mortality and morbidity tables (2001
CSO tables). These tables are now
prevailing within the meaning of section
807(d)(5) and have a mandatory
effective date of January 1, 2009. In
some States, insurers have the option to
use either the 1980 CSO tables or the
2001 CSO tables for contracts issued
before January 1, 2009. Either changing
from the 1980 CSO mortality tables to
the 2001 CSO tables or adopting
changes to the determination of the
insured’s attained age under this
regulation (or both) may require filing
new contract forms with the relevant
state insurance commissioners and may
require changes to existing compliance
systems. Accordingly, the effective date
of this final regulation has been adjusted
to take into account the transition
period for adoption of the new mortality
tables. Specifically, the final regulations
apply to life insurance contracts that are
either (1) Issued after December 31,
2008, or (2) issued on or October 1, 2007
and based upon the 2001 CSO tables.
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This modification will enable issuers to
make any changes required by this final
regulation concurrently with the
changes required by the adoption of the
2001 CSO mortality tables. In addition,
taxpayers may apply the regulations for
contracts issued before October 1, 2007,
provided they do not later determine
qualification of those contracts under
section 7702 in a manner inconsistent
with the regulations.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) and (d) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and
because the regulations do not impose a
collection of information on small
entities, the Regulatory Flexibility Act
(5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking
preceding this Treasury decision was
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
§ 1.7702–1
Mortality charges.
(a) General rule.
(b) Reasonable mortality charges.
(1) Actually expected to be imposed.
(2) Limit on charges.
(c) Safe harbors.
(1) 1980 C.S.O. Basic Mortality Tables.
(2) Unisex tables and smoker/nonsmoker
tables.
(3) Certain contracts based on 1958 C.S.O.
table.
(d) Definitions.
(1) Prevailing commissioners’ standard
tables.
(2) Substandard risk.
(3) Nonparticipating contract.
(4) Charge reduction mechanism.
(5) Plan of insurance.
(e) Effective date.
§ 1.7702–2 Attained age of the insured
under a life insurance contract.
(a) In general.
(b) Contract insuring a single life.
(c) Contract insuring multiple lives on a
last-to-die basis.
(1) In general.
(2) Modifications to cash value and future
mortality charges upon the death of insured.
(d) Contract insuring multiple lives on a
first-to-die basis.
(e) Examples.
(f) Effective dates.
(1) In general.
(2) Contracts issued before the general
effective date.
Drafting Information
The principal author of these final
regulations is Ann H. Logan, Office of
the Associate Chief Counsel (Financial
Institutions and Products), Office of
Chief Counsel, Internal Revenue
Service. However, personnel from other
offices of the IRS and the Treasury
Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
I
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
in numerical order to read as follows:
I
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Authority: 26 U.S.C. 7805 * * *.
Section 1.7702–2 also issued under 26
U.S.C. 7702(k). * * *
I Par. 2. Section 1.7702–0 is added to
read as follows:
§ 1.7702–0
Table of contents.
This section lists the captions that
appear in §§ 1.7702–1, 1.7702–2, and
1.7702–3.
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§ 1.7702–3
Definitions.
(a) In general.
(b) Cash value.
(1) In general.
(2) Amounts excluded from cash value.
(c) Death benefit.
(1) In general.
(2) Qualified accelerated death benefit
treated as death benefit.
(d) Qualified accelerated death benefit.
(1) In general.
(2) Determination of present value of the
reduction in death benefit.
(3) Examples.
(e) Terminally ill defined.
(f) Certain other additional benefits.
(1) In general.
(2) Examples.
(g) Adjustments under section 7702(f)(7).
(h) Cash surrender value.
(1) In general.
(2) For purposes of section 7702(f)(7).
(i) Net surrender value.
(j) Effective date and special rules.
(1) In general.
(2) Provision of certain benefits before July
1, 1993.
(i) Not treated as cash value.
(ii) No effect on date of issuance.
(iii) Special rule for addition of benefit or
loan provision after December 15, 1992.
(3) Addition of qualified accelerated death
benefit.
(4) Addition of other additional benefits.
I Par. 3. Section 1.7702–2 is added to
read as follows:
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§ 1.7702–2 Attained age of the insured
under a life insurance contract.
(a) In general. This section provides
guidance on determining the attained
age of an insured under a contract that
is a life insurance contract under the
applicable law, for purposes of
determining the guideline level
premium of the contract under section
7702(c)(4), applying the cash value
corridor of section 7702(d) or applying
the computational rules of section
7702(e), as applicable.
(b) Contract insuring a single life. (1)
If a contract insures the life of a single
individual, either of the following two
ages may be treated as the attained age
of the insured with respect to that
contract—
(i) The insured’s age determined by
reference to the individual’s actual
birthday as of the date of determination
(actual age); or
(ii) The insured’s age determined by
reference to contract anniversary (rather
than the individual’s actual birthday),
so long as the age assumed under the
contract (contract age) is within 12
months of the actual age as of that date.
(2) Once determined under paragraph
(b)(1) of this section, the attained age
with respect to an individual insured
under a contract changes annually.
Moreover, the same attained age must be
used for purposes of applying sections
7702(c)(4), 7702(d), and 7702(e), as
applicable.
(c) Contract insuring multiple lives on
a last-to-die basis—(1) In general.
Except as provided in paragraph (c)(2)
of this section, if a contract insures the
lives of more than one individual on a
last-to-die basis, the attained age of the
insured is determined by applying
paragraph (b) of this section as if the
youngest individual were the only
insured under the contract for purposes
of sections 7702(c)(4), 7702(d), and
7702(e), as applicable.
(2) Modifications to cash value and
future mortality charges upon the death
of insured. If both the cash value and
future mortality charges under a
contract change by reason of the death
of one or more insureds to no longer
take into account the attained age of the
deceased insured or insureds, the
youngest surviving insured shall
thereafter be treated as the only insured
under the contract.
(d) Contract insuring multiple lives on
a first-to-die basis. If a contract insures
the lives of more than one individual on
a first-to-die basis, the attained age of
the insured is determined by applying
paragraph (b) of this section as if the
oldest individual were the only insured
under the contract for purposes of
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sections 7702(c)(4), 7702(d), and
7702(e), as applicable.
(e) Examples. The following examples
illustrate the determination of the
attained age of the insured for purposes
of sections 7702(c)(4), 7702(d), and
7702(e), as applicable. The examples are
as follows:
Example 1. (i) X was born on May 1, 1947.
X became 60 years old on May 1, 2007. On
January 1, 2008, X purchases from IC a
contract insuring X’s life. January 1 is the
contract anniversary date for all future years.
IC determines X’s annual premiums on an
age-last-birthday basis. Based on the method
used by IC to determine age, X has an
attained age of 60 for the first contract year,
61 for the second contract year, and so on.
(ii) Section 1.7702–2(b)(1) permits the
determination of attained age under either of
two alternative approaches. Section 1.7702–
2(b)(1)(i) provides that, if a contract insures
the life of a single insured individual, the
attained age may be determined by reference
to the individual’s actual birthday as of the
date of determination. Under this provision,
X has an attained age of 60 for the first
contract year, 61 for the second contract year,
and so on. Alternatively, § 1.7702–2(b)(1)(ii)
provides that the insured’s age may be
determined by reference to contract
anniversary (rather than the individual’s
actual birthday), so long as the age assumed
under the contract is within 12 months of the
actual age as of that date. If IC determines X’s
attained age under § 1.7702–2(b)(1)(ii), X
likewise has an attained age of 60 for the first
contract year, 61 for the second contract year,
and so on. Whichever provision IC uses to
determine X’s attained age must be used
consistently from year to year for purposes of
sections 7702(c)(4), 7702(d), and 7702(e), as
applicable.
Example 2. (i) The facts are the same as in
Example 1 except that, under the contract,
X’s annual premiums are determined on an
age-nearest-birthday basis. X’s nearest
birthday to January 1, 2008, is May 1, 2008,
when X will become 61 years old. Based on
the method used by IC to determine age, X
has an attained age of 61 for the first contract
year, 62 for the second contract year, and so
on.
(ii) Section 1.7702–2(b)(1) permits the
determination of attained age under either of
two alternative approaches. Section 1.7702–
2(b)(1)(i) provides that, if a contract insures
the life of a single insured individual, the
attained age may be determined by reference
to the individual’s actual birthday as of the
date of determination. Under this provision,
X has an attained age of 60 for the first
contract year, 61 for the second contract year,
and so on. Alternatively, § 1.7702–2(b)(1)(ii)
provides that the insured’s age may be
determined by reference to contract
anniversary (rather than the individual’s
actual birthday), so long as the age assumed
under the contract is within 12 months of the
actual age as of that date. If IC determines X’s
attained age under § 1.7702–2(b)(1)(ii), X has
an attained age of 61 for the first contract
year, 62 for the second contract year, and so
on. Whichever provision IC uses to
determine X’s attained age must be used
VerDate Aug<31>2005
15:10 Sep 12, 2006
Jkt 208001
consistently from year to year for purposes of
sections 7702(c)(4), 7702(d), and 7702(e), as
applicable.
Example 3. (i) The facts are the same as in
Example 1 except that the face amount of the
contract is increased on May 15, 2011.
During the contract year beginning January 1,
2011, the age assumed under the contract on
an age-last-birthday basis is 63 years.
However, X has an actual age of 64 as of the
date the face amount of the contract is
increased.
(ii) Section 1.7702–2(b)(1)(ii) provides that
the insured’s age may be determined by
reference to contract anniversary (rather than
the individual’s actual birthday), so long as
the age assumed under the contract is within
12 months of the actual age. Section 1.7702–
2(b)(2) provides that, once determined under
paragraph (b)(1) of this section, the attained
age with respect to an individual insured
under a contract changes annually.
Accordingly, X continues to be 63 years old
throughout the contract year beginning
January 1, 2011, for purposes of sections
7702(c)(4), 7702(d), and 7702(e), as
applicable.
Example 4. (i) The facts are the same as in
Example 1 except that in addition to X (born
in 1947), the insurance contract also insures
the life of Y, born on September 1, 1942. The
death benefit will be paid when the second
of the two insureds dies.
(ii) Section 1.7702–2(c)(1) provides that if
a life insurance contract insures the lives of
more than one individual on a last-to-die
basis, the attained age of the insured is
determined by applying § 1.7702–2(b) as if
the youngest individual were the only
insured under the contract. Because X is
younger than Y, the attained age of X must
be used for purposes of sections 7702(c)(4),
7702(d), and 7702(e), as applicable.
Example 5. (i) The facts are the same as
Example 4 except that X (the younger of the
two insureds) dies in 2012. After X’s death,
both the cash value and mortality charges of
the life insurance contract are adjusted to
take into account only the life of Y.
(ii) Section 1.7702–2(c)(1) provides that if
a life insurance contract insures the lives of
more than one individual on a last-to-die
basis, the attained age of the insured is
determined by applying § 1.7702–2(b) as if
the youngest individual were the only
insured under the contract. Paragraph (c)(2)
of this section provides that if both the cash
value and future mortality charges under a
contract change by reason of the death of an
insured to no longer take into account the
attained age of the deceased insured, the
youngest surviving insured is thereafter
treated as the only insured under the
contract. Because both the cash value and
mortality charges are adjusted after X’s death
to take into account only the life of Y, only
the attained age of Y is taken into account
after X’s death for purposes of sections
7702(c)(4), 7702(d), and 7702(e), as
applicable.
Example 6. (i) The facts are the same as
Example 1 except that in addition to X (born
in 1947), the insurance contract also insures
the life of Z, born on September 1, 1952. The
death benefit will be paid when the first of
the two insureds dies.
PO 00000
Frm 00009
Fmt 4700
Sfmt 4700
53971
(ii) Section 1.7702–2(d) provides that if a
life insurance contract insures the lives of
more than one individual on a first-to-die
basis, the attained age of the insured is
determined by applying § 1.7702–2(b) as if
the oldest individual were the only insured
under the contract. Because X is older than
Z, the attained age of X must be used for
purposes of sections 7702(c)(4), 7702(d), and
7702(e), as applicable.
(f) Effective dates—(1) In general.
Except as provided in paragraph (f)(2) of
this section, these regulations apply to
all life insurance contracts that are
either—
(i) Issued after December 31, 2008; or
(ii) Issued on or after October 1, 2007
and based upon the 2001 CSO tables.
(2) Contracts issued before the general
effective date. Pursuant to section
7805(b)(7), a taxpayer may apply these
regulations retroactively for contracts
issued before October 1, 2007, provided
that the taxpayer does not later
determine qualification of those
contracts in a manner that is
inconsistent with these regulations.
Deborah M. Nolan,
Acting Deputy Commissioner for Services and
Enforcement.
Approved: September 6, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the
Treasury (Tax Policy).
[FR Doc. E6–15117 Filed 9–12–06; 8:45 am]
BILLING CODE 4830–01–P
POSTAL SERVICE
39 CFR Parts 952, 953, and 964
Rules of Practice in Proceedings
Relative to False Representation and
Lottery Cases, Determinations of
Nonmailability and Disposition of Mail
Withheld From Delivery: Changes in
Responsibility for Litigation
Postal Service.
Final rule.
AGENCY:
ACTION:
SUMMARY: The Postal ServiceTM is
transferring responsibility for
representation of the Postal Service in
certain consumer protection
administrative actions before the
Judicial Officer Department from the
Office of the General Counsel to the
Inspection Service Office of Counsel.
DATES: Effective Date: September 13,
2006.
FOR FURTHER INFORMATION CONTACT:
Diane Mego, Staff Counsel, Judicial
Office, 703–812–1905.
SUPPLEMENTARY INFORMATION:
Administrative adjudications involving
false representation, illegal lotteries, and
E:\FR\FM\13SER1.SGM
13SER1
]]>Agencies
[Federal Register Volume 71, Number 177 (Wednesday, September 13, 2006)]
[Rules and Regulations]
[Pages 53967-53971]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-15117]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9287]
RIN 1545-BE53
Attained Age of the Insured Under Section 7702
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations explaining how to
determine the attained age of an insured for purposes of testing
whether a contract qualifies as a life insurance contract for Federal
income tax purposes.
DATES: Effective Date: These regulations are effective September 13,
2006.
Applicability Dates: For dates of applicability, see Sec. 1.7702-
2(f).
FOR FURTHER INFORMATION CONTACT: Ann H. Logan, 202-622-3970 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 7702(a) of the Internal Revenue Code (Code) provides that,
for a contract to qualify as a life insurance contract for Federal
income tax purposes, the contract must be a life insurance contract
under the applicable law and must either (1) Satisfy the cash value
accumulation test of section 7702(b), or (2) both meet the guideline
premium requirements of section 7702(c) and fall within the cash value
corridor of section 7702(d). To determine whether a contract satisfies
the cash value accumulation test, or meets the guideline premium
requirements and falls within the cash value corridor, it is necessary
to determine the attained age of the insured.
A contract meets the cash value accumulation test of section
7702(b) if, by the terms of the contract, the cash surrender value of
the contract may not at any time exceed the net single
[[Page 53968]]
premium that would have to be paid at that time to fund future benefits
under the contract. Under section 7702(e)(1)(B), the maturity date of
the contract is deemed to be no earlier than the day on which the
insured attains age 95, and no later than the day on which the insured
attains age 100, for purposes of applying the cash value accumulation
test.
A contract meets the guideline premium requirements of section
7702(c) if the sum of the premiums paid under the contract does not at
any time exceed the greater of the guideline single premium or the sum
of the guideline level premiums as of such time. The guideline single
premium is the premium that is needed at the time the policy is issued
to fund the future benefits under the contract based on the following
three elements enumerated in section 7702(c)(3)(B):
(i) Reasonable mortality charges that meet the requirements (if
any) prescribed in regulations and that (except as provided in
regulations) do not exceed the mortality charges specified in the
prevailing commissioners' standard tables (as defined in section
807(d)(5)) as of the time the contract is issued;
(ii) Any reasonable charges (other than mortality charges) that (on
the basis of the company's experience, if any, with respect to similar
contracts) are reasonably expected to be actually paid; and
(iii) Interest at the greater of an annual effective rate of six
percent or the rate or rates guaranteed on issuance of the contract.
The guideline level premium is the level annual amount, payable
over a period not ending before the insured attains age 95, computed on
the same basis as the guideline single premium but using a minimum
interest rate of four percent, rather than six percent. Like the cash
value accumulation test, the guideline premium requirements are applied
by deeming the maturity date of the contract to be no earlier than the
day on which the insured attains age 95, and no later than the day on
which the insured attains age 100. The deemed maturity date generally
is the determination date set forth in the contract or the end of the
mortality table (which, when section 7702 was enacted in 1984, was age
100).
A contract falls within the cash value corridor if the death
benefit of the contract at any time is not less than the applicable
percentage of the cash surrender value. The applicable percentage is
determined based on the attained age of the insured as of the beginning
of the contract year, as follows:
Applicable Percentage
----------------------------------------------------------------------------------------------------------------
In the case of an insured with an attained age as of the beginning of the The applicable percentage
contract year of: shall decrease by a ratable
--------------------------------------------------------------------------------- portion for each full year:
But not more -------------------------------
More than: than: From: To:
----------------------------------------------------------------------------------------------------------------
0............................................................... 40 250 250
40.............................................................. 45 250 215
45.............................................................. 50 215 185
50.............................................................. 55 185 150
55.............................................................. 60 150 130
60.............................................................. 65 130 120
65.............................................................. 70 120 115
70.............................................................. 75 115 105
75.............................................................. 90 105 105
90.............................................................. 95 105 100
----------------------------------------------------------------------------------------------------------------
The Code does not define the attained age of the insured for
purposes of applying the cash value corridor, the guideline premium
limitations, or the computational rules of section 7702(e). The Senate
Finance Committee explanation of the Deficit Reduction Act of 1984,
Public Law 98-369 (98 Stat. 494), however, states that the attained age
of the insured means the insured's age determined by reference to
contract anniversaries (rather than the individual's actual birthdays),
so long as the age assumed under the contract is within 12 months of
the actual age. See S. Prt. No. 98-169, Vol. 1, at 576 (1984).
Section 7702A defines a modified endowment contract (MEC) as a
contract that meets the requirements of section 7702 (that is, a
contract that is a life insurance contract), but that fails to meet the
7-pay test set forth in section 7702A(b). A contract fails to meet the
7-pay test if the accumulated amount paid under the contract at any
time during the first 7 contract years exceeds the sum of the net level
premiums that would have been paid on or before that time if the
contract provided for paid-up future benefits after the payment of 7
level annual premiums. Section 7702A(c)(1)(B) provides that, for
purposes of this test, the computational rules of section 7702(e)
generally apply, including the contract's deemed maturity no earlier
than the day on which the insured attains age 95, and no later than the
day on which the insured attains age 100.
In sum, the attained age of an insured under a contract that is a
life insurance contract under the applicable law must be determined to
test whether the contract complies with the guideline premium
requirements of section 7702(c), the cash value corridor of section
7702(d), and (by reason of the computational rules of section 7702(e))
the cash value accumulation test of section 7702(b) and the 7-pay test
of section 7702A(b), as applicable.
On May 24, 2005, the IRS and Treasury Department published a notice
of proposed rulemaking (REG-168892-03), (2005-25 I.R.B. 1293, June 20,
2005) in the Federal Register (70 FR 29671) (the proposed regulations).
The proposed regulations provide guidance on how to determine the
attained age of an individual insured under a contract that is a life
insurance contract under the applicable law, for purposes of testing
whether the contract qualifies as a life insurance contract under
section 7702 and is a modified endowment contract under section 7702A.
Under the proposed regulations, the attained age of the insured is
either (i) The insured's age determined by reference to the
individual's actual birthday as of the date of determination (actual
age) or (ii) the insured's age determined by reference to contract
anniversary (rather than the individual's actual birthday),
[[Page 53969]]
so long as the age assumed under the contract (contract age) is within
12 months of the actual age. The proposed regulations provide that the
attained age of the insured under a contract insuring multiple lives on
a last-to-die basis is the attained age of the youngest insured, and
the attained age of the insured under a contract insuring multiple
lives on a first-to-die basis is the attained age of the oldest
insured.
The sole party requesting a public hearing timely withdrew its
request. One written comment regarding the notice of proposed
rulemaking was received.
Explanation of Provisions
After consideration of the written comment received, this Treasury
decision adopts the regulations as proposed, with the modifications
noted below.
A. Identity of the Insured Individual
The proposed regulations provide that, in the case of a last-to-die
contract, the attained age of the insured means the age of the youngest
individual insured under the contract. The comment letter pointed out
that, in the case of such a contract, the death of the youngest insured
raises a question whether the attained age under the contract should
continue to be determined based on the attained age of the deceased
insured, or should instead be based on the attained age of the youngest
surviving insured. Some last-to-die life insurance contracts undergo a
change in both cash value and future mortality charges as a result of
the death of an insured. These changes take into account the identity
of the surviving insured or insureds. Other last-to-die life insurance
contracts treat the death of an insured as a non-event for purposes of
measuring cash value and future mortality charges under the contract.
The comment letter suggested a rule for last-to-die contracts that
would take into account the age of the youngest surviving insured if
the contract undergoes modifications to both the cash value and future
mortality charges under the contract, so that the attained age
assumptions used for Federal income tax purposes are consistent with
those used under the terms of the contract. The final regulations
include such a rule in Sec. 1.7702-2(c)(2).
B. Changes in Benefits Between Policy Anniversaries
The proposed regulations provide that the age of an individual
insured under a life insurance contract is either (i) The insured's age
determined by reference to the individual's actual birthday as of the
date of determination (actual age), or (ii) the insured's age
determined by reference to contract anniversary (rather than the
individual's actual birthday), so long as the age assumed under the
contract (contract age) is within 12 months of the actual age. The
proposed regulations do not, however, define the attained age to be
used if there is an increase in death benefits between policy
anniversary dates. Specifically, should the attained age as of the
beginning of the contract year continue to be used at the time of the
benefit increase, even if the date of change is closer to the next
contract anniversary? The comment letter requests flexibility to use
the attained age as of either the previous or subsequent policy
anniversary, or any age between those two ages. The final regulations
address this issue by clarifying that the attained age of the insured
under a contract, once determined, changes annually. This rule is set
forth in Sec. 1.7702-2(b)(2).
C. Use of Derived Ages for Multiple Life Contracts
Under the proposed regulations, the attained age of the insured
under a contract insuring multiple lives is either the attained age of
the youngest insured (in the case of a last-to-die contract) or the
attained age of the oldest insured (in the case of a first-to-die
contract). Some issuers, however, determine mortality charges under
such contracts using a single, derived age that does not correspond to
the attained age of any single insured under the contract. In addition,
in some cases issuers currently account for substandard risks by
determining mortality charges based on an age that is older than the
actual attained age of the insured under the contract. The comment
letter requested a rule that would permit the use of the same derived
age as the attained age of the insured in these circumstances, to avoid
whatever administrative complexities could result from the use of
different ages for different purposes in the course of testing
compliance of the contracts with sections 7702 and 7702A.
The final regulations do not make this change. The manner in which
age is used to determine reasonable mortality charges under section
7702(c)(3)(B)(i) is independent of the age that is treated as the
attained age of the insured for purposes of determining the guideline
level premium under section 7702(c)(4), or applying the cash value
corridor of section 7702(d) or the computational rules of section
7702(e). The final regulations do not, nor are they intended to,
endorse or prohibit any methodology for determining reasonable
mortality charges under section 7702(c). Reasonable mortality charges
were the subject of regulations proposed July 5, 1991, (FI-069-89)
(1991-2 C.B. 963) in the Federal Register (56 FR 30718), and also were
addressed in Notice 88-128, 1988-2 C.B. 540, and Notice 2004-61, 2004-2
C.B. 596. See Sec. 601.601(d)(2)(ii). This prior guidance is not
modified, clarified, or in any other way affected by these final
regulations.
D. Contract Anniversary
The comment letter requested that the regulations include a
definition of contract anniversary other than the issue date of the
contract and subsequent anniversaries of that date. The final
regulations do not include such a definition because the terms issue
date and contract year have broad application, and it would be
inappropriate to address the matter for the first time in these final
regulations.
E. Effective Date
The proposed regulations were proposed to apply to contracts issued
on or after the date that is one year after the regulations are
published as final regulations in the Federal Register. A taxpayer
would be permitted, however, to apply these final regulations
retroactively for contracts issued before that date provided the
taxpayer does not later determine qualification of those contracts in a
manner that is inconsistent with these regulations.
The comment letter requested that the final regulations conform
more closely to the adoption dates for the 2001 Commissioners' Standard
Ordinary mortality and morbidity tables (2001 CSO tables). These tables
are now prevailing within the meaning of section 807(d)(5) and have a
mandatory effective date of January 1, 2009. In some States, insurers
have the option to use either the 1980 CSO tables or the 2001 CSO
tables for contracts issued before January 1, 2009. Either changing
from the 1980 CSO mortality tables to the 2001 CSO tables or adopting
changes to the determination of the insured's attained age under this
regulation (or both) may require filing new contract forms with the
relevant state insurance commissioners and may require changes to
existing compliance systems. Accordingly, the effective date of this
final regulation has been adjusted to take into account the transition
period for adoption of the new mortality tables. Specifically, the
final regulations apply to life insurance contracts that are either (1)
Issued after December 31, 2008, or (2) issued on or October 1, 2007 and
based upon the 2001 CSO tables.
[[Page 53970]]
This modification will enable issuers to make any changes required by
this final regulation concurrently with the changes required by the
adoption of the 2001 CSO mortality tables. In addition, taxpayers may
apply the regulations for contracts issued before October 1, 2007,
provided they do not later determine qualification of those contracts
under section 7702 in a manner inconsistent with the regulations.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) and (d) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to these regulations, and
because the regulations do not impose a collection of information on
small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f) of the Code, the notice of
proposed rulemaking preceding this Treasury decision was submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these final regulations is Ann H. Logan,
Office of the Associate Chief Counsel (Financial Institutions and
Products), Office of Chief Counsel, Internal Revenue Service. However,
personnel from other offices of the IRS and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *.
Section 1.7702-2 also issued under 26 U.S.C. 7702(k). * * *
0
Par. 2. Section 1.7702-0 is added to read as follows:
Sec. 1.7702-0 Table of contents.
This section lists the captions that appear in Sec. Sec. 1.7702-1,
1.7702-2, and 1.7702-3.
Sec. 1.7702-1 Mortality charges.
(a) General rule.
(b) Reasonable mortality charges.
(1) Actually expected to be imposed.
(2) Limit on charges.
(c) Safe harbors.
(1) 1980 C.S.O. Basic Mortality Tables.
(2) Unisex tables and smoker/nonsmoker tables.
(3) Certain contracts based on 1958 C.S.O. table.
(d) Definitions.
(1) Prevailing commissioners' standard tables.
(2) Substandard risk.
(3) Nonparticipating contract.
(4) Charge reduction mechanism.
(5) Plan of insurance.
(e) Effective date.
Sec. 1.7702-2 Attained age of the insured under a life insurance
contract.
(a) In general.
(b) Contract insuring a single life.
(c) Contract insuring multiple lives on a last-to-die basis.
(1) In general.
(2) Modifications to cash value and future mortality charges
upon the death of insured.
(d) Contract insuring multiple lives on a first-to-die basis.
(e) Examples.
(f) Effective dates.
(1) In general.
(2) Contracts issued before the general effective date.
Sec. 1.7702-3 Definitions.
(a) In general.
(b) Cash value.
(1) In general.
(2) Amounts excluded from cash value.
(c) Death benefit.
(1) In general.
(2) Qualified accelerated death benefit treated as death
benefit.
(d) Qualified accelerated death benefit.
(1) In general.
(2) Determination of present value of the reduction in death
benefit.
(3) Examples.
(e) Terminally ill defined.
(f) Certain other additional benefits.
(1) In general.
(2) Examples.
(g) Adjustments under section 7702(f)(7).
(h) Cash surrender value.
(1) In general.
(2) For purposes of section 7702(f)(7).
(i) Net surrender value.
(j) Effective date and special rules.
(1) In general.
(2) Provision of certain benefits before July 1, 1993.
(i) Not treated as cash value.
(ii) No effect on date of issuance.
(iii) Special rule for addition of benefit or loan provision
after December 15, 1992.
(3) Addition of qualified accelerated death benefit.
(4) Addition of other additional benefits.
0
Par. 3. Section 1.7702-2 is added to read as follows:
Sec. 1.7702-2 Attained age of the insured under a life insurance
contract.
(a) In general. This section provides guidance on determining the
attained age of an insured under a contract that is a life insurance
contract under the applicable law, for purposes of determining the
guideline level premium of the contract under section 7702(c)(4),
applying the cash value corridor of section 7702(d) or applying the
computational rules of section 7702(e), as applicable.
(b) Contract insuring a single life. (1) If a contract insures the
life of a single individual, either of the following two ages may be
treated as the attained age of the insured with respect to that
contract--
(i) The insured's age determined by reference to the individual's
actual birthday as of the date of determination (actual age); or
(ii) The insured's age determined by reference to contract
anniversary (rather than the individual's actual birthday), so long as
the age assumed under the contract (contract age) is within 12 months
of the actual age as of that date.
(2) Once determined under paragraph (b)(1) of this section, the
attained age with respect to an individual insured under a contract
changes annually. Moreover, the same attained age must be used for
purposes of applying sections 7702(c)(4), 7702(d), and 7702(e), as
applicable.
(c) Contract insuring multiple lives on a last-to-die basis--(1) In
general. Except as provided in paragraph (c)(2) of this section, if a
contract insures the lives of more than one individual on a last-to-die
basis, the attained age of the insured is determined by applying
paragraph (b) of this section as if the youngest individual were the
only insured under the contract for purposes of sections 7702(c)(4),
7702(d), and 7702(e), as applicable.
(2) Modifications to cash value and future mortality charges upon
the death of insured. If both the cash value and future mortality
charges under a contract change by reason of the death of one or more
insureds to no longer take into account the attained age of the
deceased insured or insureds, the youngest surviving insured shall
thereafter be treated as the only insured under the contract.
(d) Contract insuring multiple lives on a first-to-die basis. If a
contract insures the lives of more than one individual on a first-to-
die basis, the attained age of the insured is determined by applying
paragraph (b) of this section as if the oldest individual were the only
insured under the contract for purposes of
[[Page 53971]]
sections 7702(c)(4), 7702(d), and 7702(e), as applicable.
(e) Examples. The following examples illustrate the determination
of the attained age of the insured for purposes of sections 7702(c)(4),
7702(d), and 7702(e), as applicable. The examples are as follows:
Example 1. (i) X was born on May 1, 1947. X became 60 years old
on May 1, 2007. On January 1, 2008, X purchases from IC a contract
insuring X's life. January 1 is the contract anniversary date for
all future years. IC determines X's annual premiums on an age-last-
birthday basis. Based on the method used by IC to determine age, X
has an attained age of 60 for the first contract year, 61 for the
second contract year, and so on.
(ii) Section 1.7702-2(b)(1) permits the determination of
attained age under either of two alternative approaches. Section
1.7702-2(b)(1)(i) provides that, if a contract insures the life of a
single insured individual, the attained age may be determined by
reference to the individual's actual birthday as of the date of
determination. Under this provision, X has an attained age of 60 for
the first contract year, 61 for the second contract year, and so on.
Alternatively, Sec. 1.7702-2(b)(1)(ii) provides that the insured's
age may be determined by reference to contract anniversary (rather
than the individual's actual birthday), so long as the age assumed
under the contract is within 12 months of the actual age as of that
date. If IC determines X's attained age under Sec. 1.7702-
2(b)(1)(ii), X likewise has an attained age of 60 for the first
contract year, 61 for the second contract year, and so on. Whichever
provision IC uses to determine X's attained age must be used
consistently from year to year for purposes of sections 7702(c)(4),
7702(d), and 7702(e), as applicable.
Example 2. (i) The facts are the same as in Example 1 except
that, under the contract, X's annual premiums are determined on an
age-nearest-birthday basis. X's nearest birthday to January 1, 2008,
is May 1, 2008, when X will become 61 years old. Based on the method
used by IC to determine age, X has an attained age of 61 for the
first contract year, 62 for the second contract year, and so on.
(ii) Section 1.7702-2(b)(1) permits the determination of
attained age under either of two alternative approaches. Section
1.7702-2(b)(1)(i) provides that, if a contract insures the life of a
single insured individual, the attained age may be determined by
reference to the individual's actual birthday as of the date of
determination. Under this provision, X has an attained age of 60 for
the first contract year, 61 for the second contract year, and so on.
Alternatively, Sec. 1.7702-2(b)(1)(ii) provides that the insured's
age may be determined by reference to contract anniversary (rather
than the individual's actual birthday), so long as the age assumed
under the contract is within 12 months of the actual age as of that
date. If IC determines X's attained age under Sec. 1.7702-
2(b)(1)(ii), X has an attained age of 61 for the first contract
year, 62 for the second contract year, and so on. Whichever
provision IC uses to determine X's attained age must be used
consistently from year to year for purposes of sections 7702(c)(4),
7702(d), and 7702(e), as applicable.
Example 3. (i) The facts are the same as in Example 1 except
that the face amount of the contract is increased on May 15, 2011.
During the contract year beginning January 1, 2011, the age assumed
under the contract on an age-last-birthday basis is 63 years.
However, X has an actual age of 64 as of the date the face amount of
the contract is increased.
(ii) Section 1.7702-2(b)(1)(ii) provides that the insured's age
may be determined by reference to contract anniversary (rather than
the individual's actual birthday), so long as the age assumed under
the contract is within 12 months of the actual age. Section 1.7702-
2(b)(2) provides that, once determined under paragraph (b)(1) of
this section, the attained age with respect to an individual insured
under a contract changes annually. Accordingly, X continues to be 63
years old throughout the contract year beginning January 1, 2011,
for purposes of sections 7702(c)(4), 7702(d), and 7702(e), as
applicable.
Example 4. (i) The facts are the same as in Example 1 except
that in addition to X (born in 1947), the insurance contract also
insures the life of Y, born on September 1, 1942. The death benefit
will be paid when the second of the two insureds dies.
(ii) Section 1.7702-2(c)(1) provides that if a life insurance
contract insures the lives of more than one individual on a last-to-
die basis, the attained age of the insured is determined by applying
Sec. 1.7702-2(b) as if the youngest individual were the only
insured under the contract. Because X is younger than Y, the
attained age of X must be used for purposes of sections 7702(c)(4),
7702(d), and 7702(e), as applicable.
Example 5. (i) The facts are the same as Example 4 except that X
(the younger of the two insureds) dies in 2012. After X's death,
both the cash value and mortality charges of the life insurance
contract are adjusted to take into account only the life of Y.
(ii) Section 1.7702-2(c)(1) provides that if a life insurance
contract insures the lives of more than one individual on a last-to-
die basis, the attained age of the insured is determined by applying
Sec. 1.7702-2(b) as if the youngest individual were the only
insured under the contract. Paragraph (c)(2) of this section
provides that if both the cash value and future mortality charges
under a contract change by reason of the death of an insured to no
longer take into account the attained age of the deceased insured,
the youngest surviving insured is thereafter treated as the only
insured under the contract. Because both the cash value and
mortality charges are adjusted after X's death to take into account
only the life of Y, only the attained age of Y is taken into account
after X's death for purposes of sections 7702(c)(4), 7702(d), and
7702(e), as applicable.
Example 6. (i) The facts are the same as Example 1 except that
in addition to X (born in 1947), the insurance contract also insures
the life of Z, born on September 1, 1952. The death benefit will be
paid when the first of the two insureds dies.
(ii) Section 1.7702-2(d) provides that if a life insurance
contract insures the lives of more than one individual on a first-
to-die basis, the attained age of the insured is determined by
applying Sec. 1.7702-2(b) as if the oldest individual were the only
insured under the contract. Because X is older than Z, the attained
age of X must be used for purposes of sections 7702(c)(4), 7702(d),
and 7702(e), as applicable.
(f) Effective dates--(1) In general. Except as provided in
paragraph (f)(2) of this section, these regulations apply to all life
insurance contracts that are either--
(i) Issued after December 31, 2008; or
(ii) Issued on or after October 1, 2007 and based upon the 2001 CSO
tables.
(2) Contracts issued before the general effective date. Pursuant to
section 7805(b)(7), a taxpayer may apply these regulations
retroactively for contracts issued before October 1, 2007, provided
that the taxpayer does not later determine qualification of those
contracts in a manner that is inconsistent with these regulations.
Deborah M. Nolan,
Acting Deputy Commissioner for Services and Enforcement.
Approved: September 6, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E6-15117 Filed 9-12-06; 8:45 am]
BILLING CODE 4830-01-P
