2023 Life Meeting - Session 7B: New Looks at Life Insurance US Tax Compliance - IRC Section 7702/7702A 8.22.23 Recording

At the end of December 2020, Congress enacted the Consolidated Appropriates Act, 2021, which included revisions to Section 7702. Effective for policies issued after December 31, 2020, the fixed 4% and 6% minimum annual effective rates under these tests were changed to refer to a market-based rate called the “insurance interest rate”. For contracts issued in 2021, the insurance rate was set to 2% - defined as the lower of the Section 7702 applicable federal interest rate based on the 60-month period ending December 2019 (2%) and the Section 7702 valuation interest rate in effect for 2020 (3.5%). This reduction in the rates used for compliance testing required significant product, operational, and technology changes for companies to reach product compliance. After 2021, the insurance interest rate is redetermined annually with a minimum change floor.

Issuing and maintaining tax-compliance contracts with a changing interest rate floor will require some product development, pricing, illustration, and administrative flexibility unlike in the past. In this session, we will review a primer on tax compliance, including the new interest rate floors. Then we will retrospect on the product, operational, and technological changes that were required when rates changed in 2021 (how did it go?), before turning to what could happen in the near future, e.g., if insurance interest rates rise, and what changes would be required (are you ready?). Additionally, we will explore similar impacts across these areas for Section 7702A compliance.