CAA 2021 Gives Life Insurers Interest Rate Flexibility

Drafters added the provision to the Heroes Act bill "to reflect the interest rate environment that has been exacerbated by the current crisis, and ensures that the rates will continue to appropriately reflect economic conditions," according to a section-by-section summary released by bill supporters.

Budget analysts at the Joint Committee on Taxation estimated in May that the change could reduce federal income tax revenue by about $3.3 billion over 10 years.

Congressional leaders later bundled the life insurance rate provision, and other Heroes Act provisions, into the CAA 2021 package.

Cash Value Accumulation v. Nonforfeiture Values

IRC Section 7702 has imposed what amounts to a cap on how much cash value a life insurance policy can accumulate.

The life insurance policy nonforfeiture rules developed by the National Association Insurance Commissioners (NAIC) set a floor on policy values, by establishing standards for how much cash customers who drop their policies should get back. The NAIC has set its nonforfeiture interest floor at 4% to match the 4% floor in the federal government's Section 7702 cash value accumulation test.

The NAIC recently made 0.15% the new minimum nonforfeiture interest rate floor for individual deferred annuities.

Members of the Life Insurance Actuarial Task Force have been talking about changing the NAIC's 4% nonforfeiture interest floor for life insurance.

Representatives from the American Council of Life Insurers said that, if the Heroes Act interest rate rules took effect, the NAIC should consider replacing the fixed 4% interest rate floor for life insurance with an indexed rate that would vary along with the Section 7702 interest rate benchmarks, according to draft meeting minutes, from May 21, that were included in a document packet for the NAIC's summer national meeting.

Representatives from some life insurers said they were afraid that decreasing the nonforfeiture rate floor, and increasing policy cash values, would make basic life insurance protection policies too expensive.

— Read CAA 2021 Package Includes Life Insurance Interest Rate Provision, on ThinkAdvisor.

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