Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 78-71

1978-1 C.B. 203

Sec. 801

IRS Headnote

Life insurance companies; computation of reserves for immediate payment of death claims. Life insurance reserves for newly issued contracts computed under the assumption that death claims are paid immediately upon receipt of proof of death are insurance reserves within the meaning of section 801(b) of the Code.

Full Text

Rev. Rul. 78-71

Advice has been requested with respect to the calculation of life insurance reserves established upon issuance of life insurance contracts for which the taxpayer, a life insurance company subject to tax imposed by section 802 of the Code, assumes that death claims are paid upon receipt of proof of death rather than at the end of the policy year. Either of two methods may be used to calculate the reserves for such newly issued contracts.

The taxpayer computes the life insurance reserves established for its newly issued life insurance contracts, which reserves are set aside to mature or liquidate future unaccrued claims, on the basis of recognized mortality tables and assumed rates of interest. In computing such reserves the taxpayer assumed that all death claims are paid upon receipt of proof of death which, on the average, will be in the middle of the policy year. Such basis constitutes a proper method of calculating life insurance reserves that otherwise qualify as such under section 801(b) of the Code.

Heretofore the taxpayer has computed its life insurance reserves on its previously issued life insurance contracts on the assumption that premiums are received at the beginning of the policy year and death claims are paid at the end of the policy year. This likewise constitutes a proper method of calculating qualified life insurance reserves.

For various administrative reasons the taxpayer has chosen to calculate the reserves for its newly issued contracts assuming claims are paid at the end of the year, together with a calculation for a half-year's interest to adjust for the fact that the taxpayer is paying death claims on the average in the middle of the year. The two together represent a single reserve that is established and maintained for the block of newly issued contracts and constitutes a proper valuation of the reserve. The half-year's interest can be approximated by any of the following formulas:

(a) i/2; or
(b) i/??? - 1; or
(c) (1 + i)1/2 - 1.

Whichever formula is used can be applied only to that portion of the reserve equal to a reserve for an ordinary life policy with death benefits and premium paying periods equal to those of the newly issued policies.

For the treatment of a taxpayer that wishes to change the valuation of the reserves maintained for its previously issued contracts from a computation based on payment of death claims at the end of the policy year to a computation based on payment upon receipt of proof of death, see Rev. Rul. 70-192, 1970-1 C.B 153.