GSP = the applicable accumulation test minimum rate + 2%.The minimum of 4% and the insurance interest rate from IRC Section 7702(f)(11).
CVAT = the applicable accumulation test minimum rate.Interest rates for the following premium limits and CVAT corridors will be determined using the following approach: Starting in 2022, Interest rates will be determined using a formula approach. This bill included long-awaited, though unanticipated, changes to the interest rate assumptions and their determination for IRC 77A calculations. The Consolidated Appropriations Act 2021 was passed at the end of 2020. Back in the 1980s, when IRC 77A were drafted, interest rates were significantly higher, and 6% or 4% were more in line with market interest rates of that decade. The Guideline Annual Premium (GAP), CVAT and MEC premiums were based on the greater of 4% or the interest rate guaranteed in the contract.Īs interest rates have continued their downward slide from the high-interest rates of the 1980s, the use of 6% (GSP) and 4% (CVAT/GAP/MEC) to develop IRC 77A have become out of touch with the level of interest rates in the market. For the Guideline Single Premium (GSP) test, the interest rate assumption is the greater of 6% or the interest rate guaranteed in the contract. Return of basis is a non-taxable event.įrom the beginning of IRC 77A, the interest rate assumptions used to develop the various premium limits have been fixed. A non-MEC retains a more favorable first-in, first-out tax treatment (FIFO), where cost basis is assumed to be taken out first. A MEC is taxed on a less favorable last-in, first-out basis (LIFO), where earnings are assumed to be taken out first when a disbursement is made from a life insurance policy. If the 7-Pay premium limit is breached, the contract is determined to be a MEC. IRC 7702A has a premium test used to determine whether the contract is a Modified Endowment (MEC) or non-MEC. The GPT also uses a corridor factor, like the CVAT, although the corridor factors are lower than those used for the CVAT. The Guideline Premium Test (GPT) establishes the maximum amount of premiums that can be paid into a life insurance contract relative to the contract's benefits (base plan face amount and other qualified rider benefits). The Cash Value Accumulation Test (CVAT) establishes a corridor factor that is applied to the cash value to set a floor on the death benefit in a life insurance contract. The test is selected at time of issuance and cannot be changed once the policy is issued. IRC 7702 has two tests and a life insurance contract must pass one of the two tests. Each IRC harkens back to the 1980s and have been periodically and sporadically updated over the years.įrom a high-level perspective, each IRC determines a limit on premiums that can be paid into a life insurance contract and establishes a certain level of risk that must be maintained within the context of a life insurance contract. IRC 7702 and IRC 7702A are some of the most important Internal Revenue Codes (IRCs) that impact the sales and design of life insurance policies in the U.S.