67 / How is the guideline premium and cash value corridor test met?

To meet the guideline premium and cash corridor test, the contract must first meet certain guideline premium requirements and, second, the contract must fall within the cash value corridor.

For the contract to meet the guideline premium requirement, the sum of the premiums paid under the contract must not at any time exceed the greater of (1) the guideline single premium as of such time, or (2) the sum of the guideline level premiums to such date.¹Premiums paid for purposes of this section means those paid under the contract less excludable amounts that are not received as an annuity under IRC Section 72(e) (e.g., dividends).²

The guideline single premium is the premium necessary to fund future benefits under the contract, determined at the time the contract is issued using the same factors as for the net single premium ( Q 66), except that the annual effective rate of interest is 6 percent instead of 4 percent.³

The guideline level premium is the level annual amount payable over a period not ending before the insured reaches age 95, computed in the same manner as the single guideline premium, except the annual effective rate remains at the greater of 4 percent or the rate guaranteed in the contract.⁴ The IRC sets forth certain rules for computing the guideline premiums and benefits and provides special rules that, in limited circumstances, make exceptions for failing to meet the guideline premium requirements or allow premiums paid to be returned at the end of the year to correct such failures.⁵

A contract falls within the cash value corridor if the death benefit payable under the contract at any time is at least equal to an applicable percentage of the cash surrender value.

Table
In the case of an insured with an attained age as of the beginning of the contract year of:		The applicable percentage decreases by a ratable portion for each full year:
More than	But not more than	From	To
0	40	250	250
40	45	250	215
45	50	215	185
50	55	185	150
55	60	150	130
60	65	130	120
65	70	120	115
70	75	115	105
75	90	105	105
90	95	105	100

The determination of whether a variable life insurance contract meets either the cash value accumulation test ( Q 66) or the guideline premium cash corridor test must be made whenever the death benefit under the contract changes, but at least once during each twelve-month period.⁶

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Planning Point: Generally, use of the guideline premium test will provide higher policy cash values than the cash value corridor test when cash accumulation is the primary purpose of the policy. However, it is advisable to run the product illustration using both tests to optimize the product design.

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A variable life insurance contract will not be treated as a life insurance contract, and taxed accordingly, for any period that the underlying investments of the segregated asset account are not “adequately diversified” ( Q 552).⁷

The IRS has ruled that sub-accounts within variable life policies that were invested in hedge funds available to the general public would be considered owned by the policy owners, and thus currently taxed on the income.⁸ Sub-accounts within a variable life contract may invest in mutual funds that are available to the general public.⁹ The IRS has clarified what is meant by the phrase “general public.”¹⁰

In Revenue Procedure 2010-28, the IRS provides a safe harbor addressing the application of IRC Sections 7702 and 7702A to life insurance contracts that mature after the insured individual reaches age 100. The Revenue Procedure also addresses the treatment of amounts received under a life insurance contract after it has matured. Under the safe harbor, the IRS will not challenge the qualification of a contract as a life insurance contract under IRC Section 7702, or assert that a contract is a modified endowment contract under IRC Section 7702A ( Q 13), provided that the contract satisfies the requirements of those provisions using all of the Age 100 Testing Methodologies in Section 3.02 of Revenue Procedure 2010-28.¹¹

Contracts issued after June 30, 1984 that provide an increasing death benefit and have premium funding more rapid than ten-year level premium payments must satisfy the definition generally applicable to contracts issued after 1984, with certain exceptions.¹²