Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 79-87

1979-1 C.B. 73

Section 101

IRS Headnote

Life insurance contracts; gross income exclusion of death benefits. Variable life insurance death benefits that may increase or decrease, but not below a guaranteed minimum amount, on each policy anniversary depending on the investment experience of the separate account of the prior year's net premiums, are entirely excludable from the beneficiary's gross income under section 101(a) of the Code.

Full Text

Rev. Rul. 79-87

FACTS

A taxpayer has entered into two contracts with an insurance company for the purchase of variable life insurance on the taxpayer's life. Each policy provides for a face amount of whole life insurance and level annual premiums during the life of the taxpayer. The reserves, cash values, and premium rates of the policies are based on the 1958 CSO Table of Mortality. In Policy A, a 3 percent assumed rate of interest is utilized; in Policy B, the assumed rate is 31/2 percent. The net annual premiums are allocated to separate accounts, the assets of which are invested primarily in equity securities solely at the discretion of the insurance company.

Both policies provide a death benefit that may increase or decrease (but not below a guaranteed minimum) on each policy anniversary depending on the prior year's investment experience of the separate account and that remains constant during the ensuing policy year.

Policy A provides a guaranteed minimum death benefit equal to the policy's initial face amount; Policy B provides a guaranteed minimum death benefit that increases each policy year by 3 percent of the prior year's guaranteed minimum death benefit until it reaches 150 percent of the initial face amount of the policy. Because Policy B has an escalating level of minimum insurance protection, it requires level premiums that are higher than those charged for Policy A and also has higher tabular cash values.

Thus, with respect to either Policy A or B, the death benefit is equal to the policy's guaranteed minimum amount, plus any change in the death benefit for each succeeding policy year depending on the account's net return for the preceding policy year. The death benefit does not change if the net investment return of the separate account for the preceding year is equal to the assumed rate of interest specified in the policy.

Each policy provides that if the net investment return for the preceding year is greater than the assumed rate of interest, the excess over the assumed rate will be credited to the policyholders for additional death benefits in the form of paid-up whole life insurance at a premium rate specified in the policy. The paid-up insurance will also assume the same rate of interest specified in the policy. Thus, if the preceding year's net investment return of either policy is greater than the assumed rate of interest specified in the policy, the death benefit of that policy will normally increase. If the net investment return of either policy is less than the assumed rate of interest of that policy, the death benefit will decrease as if a portion of any paid-up whole life insurance is automatically cancelled at its cash value to supplement the actual investment return to the extent that such return is insufficient to cover the assumed rate of interest required for the aggregate amount of insurance provided by that policy. In no event will the death benefit of either Policy A or B decrease below the guaranteed minimum death benefit provided for in each respective policy.

Each policy may be surrendered for its cash value while the taxpayer is living. The cash surrender value may increase or decrease daily depending on the separate account's investment experience, but there is no guaranteed minimum.

HOLDING

The entire amount of the death benefits paid upon the death of the taxpayer under Policy A and Policy B is excludable from the beneficiary's gross income under section 101(a) of the Internal Revenue Code of 1954.