19 / Is the exchange of a life insurance policy under IRC Section 1035 subject to the seven pay test?
The effect of an IRC Section 1035 exchange on the grandfathered status of a policy issued prior to June 21, 1988, and thus not subject to the seven pay test of IRC Section 7702A, is not entirely clear.1 In a private ruling, the IRS has taken the position that a life insurance contract received in an IRC Section 1035 exchange for a life insurance contract issued before June 21, 1988, will be considered as issued and entered into on the date that it is received in exchange for the previous contract and, thus, apparently will be subject to the seven pay test.2
If an MEC requiring the payment of at least seven annual premiums was entered into after June 20, 1988, but before November 10, 1988, and was then exchanged within the three months following November 10, 1988, for a contract that meets the requirements of the seven pay test, the new contract is not treated as an MEC if the taxpayer recognized gain, if any, on the exchange.3
1. H.R. Conf. Rep. No. 100-1104 (TAMRA ’88), reprinted in 1988-3 CB 596.
2. Let. Rul. 9044022.