COVID-19 Creeps Toward Life Insurance Tax Accounting

U.S. actuaries are starting to build the effects of the COVID-19 pandemic on life expectancy into the mortality tables life insurers use to write life insurance policies and annuities.

A new update developed by a team of actuaries shows how insurers will handle mortality when administering universal life insurance policies.

The update will not have any direct effect on the mortality tables and other actuarial tables the Internal Revenue Service uses when it's looking at individual taxpayers' life insurance policies and annuities, but the same kind of thinking that's reshaping the universal life tables will eventually shape the IRS mortality tables.

The people who worked on the project "considered appropriate methods to reflect the impact of a shock mortality event like COVID-19," according to the members of the American Academy of Actuaries' Life Work Group and the Society of Actuaries Research Institute's Mortality and Longevity Oversight Advisory Council.

What it means: Ordinary people express the sorrow of the pandemic in terms of sighs and sad songs. Actuaries try to capture it in spreadsheets showing how likely people of various ages were to die in the past and how likely they are to die in the future.

For clients ages 22 through 44, the message is that the actuaries are hoping their chances of dying won't get any worse from 2026 through 2029, but they're still a little nervous about 2025.

The backdrop: Physicians have attributed 1.2 million U.S. deaths directly to COVID-19 since the illness came to light, in early 2020.

The U.S. Centers for Disease Control and Prevention has recorded 38,288 deaths attributed to COVID this year, as of Sept. 21. Deaths attributed to the disease still account for about 1.3% of U.S. deaths.

Early on, COVID-19 seemed to be a disease that killed older people.

Today, mortality rates for older people have gotten back to normal, but COVID, the effects of COVID on the health care system, the opioid epidemic and other factors are still causing a noticeable increase in mortality for people ages 22 through 44.

What the actuaries did: Actuaries call their mortality analysis efforts "mortality improvement" analysis because, before 2020, U.S. mortality statistics usually improved.

Their new update is a guide to "Individual Life Insurance Mortality Improvement Recommendation for Use with AG38/VM20."

That means this update is meant for the use by actuaries who help life insurers write and administer universal life policies subject to Actuarial Guideline 38 and the section of the Valuation Manual that tells actuaries how to calculate universal life policy reserves, or the amount of assets that should be supporting universal life policy benefits promises.

The update shows actuaries how to factor individual life insurance historical mortality improvement and future mortality improvement into their work.

Tables give different, specific historical and future mortality improvement factors for males and females ages 0 through 119.

For people who will be ages 22 through 44 in 2025, actuaries have put the "improvement" factors in parentheses, meaning that those numbers are negative numbers.

The actuaries expect the life expectancy of people ages 22 through 44 to drop in 2025. For men ages 30 through 39, the drop could could be almost 1%.

For women in their 30s, the drop could be about 0.7%.

For 2026 through 2029, the tables show hyphens, meaning that the actuaries are hoping mortality for people ages 22 through 44 will stabilize and simply stop getting worse.

The actuaries are hoping mortality improvement will increase a little for people in that age range from 2030 through 2033, and then recover to about 0.8% to 1% per year for people of most ages by 2034.

What the IRS thinks: Internal Revenue Service officials have already started mulling over what to do about the impact of COVID on mortality tables for pension plans.

For life insurance policies, higher mortality rates make reserves higher and may make taxes lower.

For pension plans and annuities, higher mortality rates may make reserves lower and taxes higher.

Some pension plan advocates asked the IRS to let pension plans use mortality tables reflecting their own participants' relatively low mortality rate during the peak years of the COVID pandemic.

Some plan advocates, for example, asked the IRS, which is an arm of the Treasury Department, to let them use mortality tables that exclude the impact of the COVID pandemic period.

"The Treasury Department and IRS have considered this approach but rejected it because providing for such an approach would mean that the mortality experience used to construct the substitute mortality table could be so out of date that it would be less reliable in predicting future mortality for the plan population," officials said.

The IRS ended up letting pension plans use mortality tables based on data from COVID-free years in 2025 if the number of plan participants hasn't changed by more than 20% since the years included in the mortality tables.

Credit: Adobe Stock