Bolstered and lobbied for by ACLI and Finseca, Section 7702 got a facelift and the rates were reestablished at 2% for the year 2021 followed by a floating interest rate moving forward. Like many acts that pass through congress, it had many items that weren’t related to Covid-19 including a dramatic and possibly long overdue change to Section 7702. In the waning hours of 2020, congress passed a Covid-19 focussed act called the HEROES Act.
Irc 7702 plus#
This was all well and good back in 1988, but over the next 30 plus years interest rates went down and they went down dramatically. The problem with Section 7702 lay in the fact that these interest rates were permanent and did not ebb and flow with the changing interest rates of the rest of the economy. Section 7702 helped realize that limit by assuming a growth of 4% or 6% interest over the life of the policy. The point of the 7-pay test was to prevent people from abusing their life insurance policy to avoid paying taxes. This was actually part of the TAMRA act of 1988. Essentially, these rates would determine the guaranteed growth of premiums over time.Īlong with the 7-pay test which held that the highest allowable amount of premium must not exceed the amount of premium necessary to pay up the death benefit in 7 years. These rates were 4% for CVAT/MEC and GPT Level Premium and 6% for GPT Single Premium. Section 7702 established interest rates for the life insurance industry. Additionally, in 1988, they added Section 7702 to the IRS tax code. They established the 7-pay test which set limits on how much money could flow into a policy without being taxed as an annuity. This gave way to the concept of a Modified Endowment Contract (MEC) that the IRS could use as a guidepost for how much premium could be put into a policy while still remaining tax-free. TEFRA and DEFRA regulations sought to rein in cash accumulating insurance policies by defining strict rules on what could be considered life insurance. The 1980s were a wild time for our industry. Section 7702: Unsustainably Flawed Policy and the Glass House of Guaranteed Benefits MEC designation under the new rates will allow for higher premiums.Premiums to fund cash accumulation policies will increase.Existing Rates for Whole Life and UL policies of 4% and 6% will be lowered for new policies to 2% for 2021 and then will float with the interest rate after 2021.What happened? And what does it mean for your current and future policyholders? Let’s take a swim. Regardless of future interest rate fluctuation, these values were permanent and remained unchanged for the next 32 years! But as with seemingly everything else in life, 2020 turned its tidal forces on 7702 in a last-gasp effort to close out the year. Section 7702, passed in 1988, is where the IRS etched in stone interest rates for policies of 4% for CVAT/MEC and the GPT Level Premium and 6% for GPT Single Premium. As though the changes that AG49-A brought to IUL illustrations this past November weren’t enough to shake up the industry, something very big was packaged in the HEROES Act by congress at the end of 2020.
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