Policies Insuring More Than One Life

<div class="Section1"><br /> <br /> Basically, no.<br /> <br /> Multiple-life policies may insure two or more lives. Typically, a &ldquo;first-to-die&rdquo; or &ldquo;joint life&rdquo; policy pays a death benefit at the death of the first insured person to die while a &ldquo;second-to-die&rdquo; or &ldquo;survivorship&rdquo; policy does not pay a death benefit until the death of the survivor. Estate planning and business continuation planning are two of the more common uses for these types of policies.<br /> <br /> Generally, multiple-life policies are subject to the same definition of life insurance applicable to policies insuring a single life. One exception is that for purposes of calculating the net single premium under IRC Section 7702, multiple-life policies may not take advantage of the three safe harbor tests set forth in proposed regulations for meeting the reasonable mortality charge requirement ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="65">65</a>).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> For multiple-life policies that meet the definition of life insurance, cash surrender value increases generally are not taxed until received ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8">8</a>) and death proceeds generally are received income tax-free ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="63">63</a>). Multiple-life policies are subject to the seven pay test of IRC Section 7702A(b) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="13">13</a>) in the same manner as single life policies. Distributions from life insurance policies entered into before June 21, 1988, or from policies entered into on or after this date that meet the seven pay test, are included in gross income only to the extent they exceed the investment in the contract ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="10">10</a>). Policies entered into on or after June 21, 1988 that do not meet the seven pay test become classified as modified endowment contracts. Distributions, including loans, from modified endowment contracts are subject to taxation rules that generally are less favorable than the rules governing the taxation of distributions from life insurance policies that are not modified endowment contracts ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="13">13</a>).<br /> <br /> In a private letter ruling, the IRS concluded that exchanges involving policies insuring a single life for a policy insuring two lives did not qualify for nonrecognition treatment under IRC Section 1035. The IRS reached this outcome in five similar fact patterns ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="44">44</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> In another private ruling, however, the IRS approved IRC Section 1035 treatment of the exchange of a joint and last survivor life insurance policy, following the death of one of the insured persons, for a universal variable life insurance policy that insured the survivor ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="44">44</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> There has been no formal guidance from the IRS as to which rates should be used to measure economic benefit when a multiple-life policy is used in an arrangement that requires the insured or insureds to include the economic benefit of the coverage in income. The most frequently used rates have been those derived from U.S. Life Table 38, which also is used to derive the P.S. 58 rates. P.S. 58 rates generally may not be used in arrangements entered into after January 27, 2002; however, in those situations, Table 2001 may be used. According to the IRS, taxpayers should make appropriate adjustments to the Table 2001 rates if the life insurance protection covers more than one life.<a href="#_ftn4" name="_ftnref4">⁴</a> When the policy death benefit is payable at the second death, it generally is believed that following the first death, the Table 2001 rates (or P.S. 58 rates, if appropriate) for single lives should be used to measure the survivor&rsquo;s economic benefit.<br /> <br /> For estate taxation of policies insuring more than one life, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="199">199</a>. For gift taxation of these policies, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="211">211</a>.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Prop. Treas. Reg. &sect;&nbsp;1.7702-1(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9542037.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9248013; <em>see also</em> Let. Rul. 9330040.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; Notice 2002-8, 2002-1 CB 398.<br /> <br /> </div></div><br />