Internal Revenue Service
Revenue Ruling
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smRev. Rul. 60-54
1960-1 C.B. 266
Sec. 801
IRS Headnote
Accident and health insurance contracts, or life insurance contracts combined with health and accident insurance, which do not impose an obligation on the issuing company to renew the contracts at a specified premium to the age of 60 or more do not constitute noncancellable health and accident insurance contracts or life insurance contracts combined with noncancellable health and accident insurance within the meaning of section 801 of the Code.
Full Text
Rev. Rul. 60-54
Advice has been requested whether a nonrenewable, single premium, health and accident insurance contract, issued alone or in conjunction with a life insurance contract, is a noncancellable health and accident insurance contract within the meaning of section 801 of the Internal Revenue Code of 1954, where such contract is issued for a term not to exceed 36 months and is not cancellable at the company's option during that period.
An insurance company offers two types of single premium insurance contracts for the purpose of securing a creditor against the death or disability of a debtor before a debt is discharged. The basic features of each contract are substantially identical. Both contracts are issued for the term of a debt, the maximum period out to exceed 36 months, and are not cancellable by the company during that period. Moreover, neither contract is renewable beyond the 36-month term. The contracts materially differ only in the scope of coverage provided. One contract merely offers health and accident benefits for the stipulated term; the other offers life, health and accident benefits.
Section 801 of the Code provides, in part, as follows:
(a) * * * For purposes of this subtitle, the term `life insurance company' means an insurance company which is engaged in the business of issuing life insurance * * * contracts (either separately or combined with health and accident insurance), or noncancellable contracts of health and accident insurance, if-
(1) its life insurance reserves (as defined in subsection (b)), plus
(2) unearned premiums and unpaid losses on noncancellable life, health, or accident policies not included in life insurance reserves, comprise more than 50 percent of its total reserves (as defined in subsection (c)).
(b) * * *
(1) * * * For purposes of this part, the term `life insurance reserves' means amounts-
*
(B) which are set aside to mature or liquidate * * * future unaccrued claims arising from life insurance, * * * and noncancellable health and accident insurance contracts (including life insurance * * * contracts combined with noncancellable health and accident insurance) involving, at the time with respect to which the reserve is computed, life, health, or accident contingencies.
Section 1.801-1(a) of the Income Tax Regulations defines a noncancellable insurance policy as a contract which the insurance company is under obligation to renew or continue at a specified premium and with respect to which a reserve in addition to the unearned premium must be carried to cover the obligation.
Revenue Ruling 56-476, C.B. 1956-2, 468, holds that where a health and accident insurance contract imposes an obligation on the issuing company to renew the contract at the insured's option to age 60 or more, the fact that the contract terminates subsequent to that age does not preclude the contract from being classified as a noncancellable health and accident insurance contract within the meaning of section 801 of the Code. This ruling rests on the grounds that such a contract imposed a fixed obligation on the issuing company, the cost of which would exceed the premiums to be received at advanced ages, and recognizes industry practice current at the time of enactment of the Revenue Act of 1942 amendment to section 201 of the 1939 Code, the predecessor of section 801 of the 1954 Code, of classifying accident and health contracts granted at a specified premium to age 60 or more as noncancellable. See Senate Report No. 1631, 77th Cong., 2d Sess., C.B. 1942-2, 504, 611.
Accordingly, it is held that where accident and health insurance contracts, such as those in the instant case, do not impose an obligation on the issuing company to renew the contracts at a specified premium to the age of 60 or more, such contracts do not constitute noncancellable health and accident insurance contracts or life insurance contracts combined with noncancellable health and accident insurance within the meaning of section 801 of the Code, even though the contracts are not terminable at the company's option during a lesser period. Therefore, the unearned premiums and unpaid losses on such contracts may not be included as part of `life insurance reserves' in determining whether an insurance company qualifies as a life insurance company for Federal income tax purposes.