Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 70-34

1970-1 C.B. 149

Sec. 801

IRS Headnote

Reserves held by a life insurance company pursuant to supplemental contracts that provide a life annuity with payments guaranteed for a specified number of years qualify as life insurance reserves under section 801(b) of the Code without regard to where the reserves are entered in the annual statements.

Full Text

Rev. Rul. 70-34

Advice has been requested whether reserves held by a life insurance company with respect to the supplemental contract described below qualify as life insurance reserves within the meaning of section 801(b) of the Internal Revenue Code of 1954.

The taxpayer is a life insurance company taxable under section 802 of the Code. It issues life insurance policies that offer a variety of settlement options. The two main categories of these settlement options are supplemental contracts not involving life contingencies and supplemental contracts involving life contingencies. Generally, reserves relating to contracts not involving life contingencies are reflected in Exhibit 10 of the annual statement filed with the state authorities while reserves involving life contingencies are reflected in Exhibit 8 of such annual statement.

The supplemental contract in the instant case offers a life annuity with payments guaranteed for a specified minimum number of years whereunder the annuitant has no contractual right to commute the annual payments to a lump sum cash withdrawal during his lifetime. When this type of settlement option becomes effective, a calculation of the amount of periodic payment is made by the insurance company by multiplying the policy proceeds by a unit factor from a table of rates set forth in the life insurance policy that provides for the settlement option. This unit factor depends upon a number of variable items such as age, sex, payment period, and type of option. The unit factors are computed on the basis of a recognized mortality table and an assumed rate of interest.

For years prior to 1966, the portion of the reserves attributable to the period-certain part of these contracts was included in Exhibit 10 of the annual statement and the balance of the reserves was included in Exhibit 10 of the annual statement and the balance of the reserves was included in Exhibit 8. As a result of this bookkeeping division, the question has arisen whether that portion of the reserves included in Exhibit 10 can qualify as life insurance reserves under section 801(b) of the Code. Since 1966, the taxpayer, for annual statement purposes, has shown the reserves set aside for both the certain and continuous portion of the contract in Exhibit 8.

Section 801(b) of the Code provides in part that the term "life insurance reserves" means amounts that are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, and that are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from annuity contracts involving (at the time with respect to which the reserve is computed) life, health, or accident contingencies.

The reserves held by the taxpayer with respect to supplemental contracts providing for a life annuity with payments guaranteed for a specific minimum number of years, satisfy the definition of life insurance reserves as set forth in section 801(b) of the Code. Accordingly, it is held that such reserves qualify as life insurance reserves within the meaning of that section without regard to where the reserves are entered in the taxpayer's annual statements.