Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 66-36

1966-1 C.B. 171

Sec. 809

IRS Headnote

Where a life insurance company accepts advance payments of premiums from its policyholders in an amount less than the contract premium, only the actual amount received is taken into account as premiums in the taxable year of receipt under section 809(c)(1) of the Internal Revenue Code of 1954. The difference, often referred to as `discount,' is accrued and credited to the section 810(c)(5) reserves over the period the payment is held before the due date of the contract premium. The contract premium is included in income as an item of gross amount in the taxable year such premium is due, and the section 810(c)(5) reserve released.

The year the contract premium is due and taken into account as an item of gross amount is also the appropriate year in which said premium is taken into account in computing the allowable deduction under section 809(d)(5) or section 809(d)(6) of the Code, if applicable.

Full Text

Rev. Rul. 66-36

Advice has been requested concerning the treatment, for purposes of section 809(c)(1) of the Internal Revenue Code of 1954, of premiums received in advance which are in an amount less than the contract premium by a life insurance company from its policyholders.

Section 809(c)(1) of the Code provides, in part, that the gross amount of premiums and other consideration, including advance premiums and deposits, on insurance and annuity contracts is taken into account, as a part of the items grouped under the heading `gross amount,' in determining the gain or loss from operations of a life insurance company under sections 809(b)(1)(C) and 809(b)(2)(C) of the Code.

Section 1.809-4(a)(1)(i) of the Income Tax Regulations provides, insofar as material here, that the term `gross amount of all premiums' means the premiums and other consideration provided on insurance and annuity contracts. Such term includes advance premiums and deposits. Thus, the amount to be taken into account is the total of the premiums and other consideration provided in the insurance or annuity contract without any reduction by reason of premiums which have been paid in advance or any other item of similar nature.

The purpose of section 1.809-4(a)(1)(i) of the regulations is to make certain that the gross contract premium is taken into account in the taxable year that the premium is due. In that taxable year, the contract premium is accounted for without reduction although the company had accepted a reduced amount in advance which, together with that portion of the interest earned on and added to such deposited amount over the period it is held by the company, will equal the gross contract premium on the due date.

For example, assume the company received $240 on December 31, 1965, as advance premium for a contract premium of $300 due January 1, 1971. In computing gross premiums on its 1965 return the company would include only $240 as advance premium. Since the premium is not yet due, the amount paid in advance represents a liability of the company to the policyholder and, therefore, the section 810(c)(5) reserve is simultaneously increased. At this point the item included in computing gross premiums is offset by a deduction under section 809(d)(2) of the Code for the increase in the reserve so that the net result is zero. The difference between the amount received and the contract premium ($60) is accrued and credited to the reserve over the 5-year period the advance premium is held before the due date. The company will be entitled to the interest paid deduction under section 805(e) of the Code and the required interest deduction under section 809(a)(2) of the Code as such amount is accrued and credited to the reserve. On January 1, 1971, the amount of the reserve will be $300 ($240 plus $60), which is the contract premium. The $300 will then be included in income as an item of gross amount in that taxable year when the reserve is released and applied to the payment of the contract premium due.

Accordingly, only the actual amount received by a life insurance company for a premium which is not yet due is taken into account as premiums in the taxable year of receipt under section 809(c)(1) of the Code. The difference between the amount received and the contract premium is accrued and credited to the section 810(c)(5) reserve over the period the company holds the amount paid before the due date of the contract premium. The contract premium is included in income as an item of gross amount in the taxable year such premium is due.

It should be noted that if the deductions provided by sections 809(d)(5) and 809(d)(6) of the Code are applicable, the amount received in advance ($240 in the foregoing example) should not be taken into account in computing the amount equal to the 3 percent or the 2 percent of the premiums for the taxable year 1965, since the premium under the contract is not due. However, for the taxable year 1971, the year in which the premium is due under the insurance contract, the amount of the contract premium ($300 in the example) should be taken into account in the computation of the deductions provided for in sections 809(d)(5) and 809(d)(6) of the Code, if applicable.