GBC White Paper - January 2021:
Interpreting and Preparing for Changes to IRC 7702 and 7702A Affecting Life Insurance Issued on or after January 1, 2021

In order to keep our clients updated on topics relevant to the industry, GBC periodically publishes informational items useful for Management's strategic planning and decision-making.

On December 27, 2020, the “Consolidated Appropriations Act, 2021” was signed into law. This Act contains provisions impacting key components of Section 7702 of the Internal Revenue Code which defines a life insurance contract for federal tax purposes.

The impact of this law is to change—effective for all life insurance contracts issued on or after January 1, 2021—the interest rates and rules for calculating Guideline Premiums (Single and Level), 7-Pay Premiums, and the Cash Value Accumulation Test (CVAT).

Based on our analysis of the Act and its impacts on Sections 7702 (and, by extension, 7702A), the rules and interest rates are changing as follows:

Guideline Single Premium: For 2021, use rate(s) guaranteed on issuance of the contract, though not less than 4% (this had been 6%)

Guideline Level Premium, 7-Pay level annual premium, CVAT: For 2021, use rate(s) guaranteed on issuance of the contract, though not less than 2% (this had been 4%)

Unlike previous language, the floor rates outlined in the amended code are not fixed (i.e., they “float” based on a moving average index). As such, the rates for 2022, 2023 and beyond are not locked in. Therefore, floor rate changes to various systems (e.g., administration, illustration, possibly others) will need to be date-sensitive to issue year going forward.

For those looking for more information, we have scripted an in-depth analysis of these changes and their impact, available here, where we also interpret the rules for deriving the floor rates, and outline an algorithm for determining the rates going forward.

In the near term, insurance companies will need to evaluate the impact these changes will have on the products they are issuing currently, and implement these rate changes in their systems. Longer term, insurers may explore product redesign to take advantage of these new rules—particularly in light of the reduction of the maximum nonforfeiture interest rate to 3.75%, which must be in place no later than for issues on or after January 1, 2022 (i.e., end of year).

Please contact us if you have additional questions or comments.