C.1 Federal Income Taxation

Question 1

DEFRA life insurance qualification test

Answer 1

-first a company must qualify as an insurance company

DEFRA qualification test: a company must have >50% of its total reserves in some combo of:

1. Life Reserves
2. Unearned Premium and unpaid losses on gtd renewable and non-cancellable A+H policies

total reserves = (1) + (2) + the following:

• unearned premiums and unpaid losses not included above
• All other reserves required by law, but not deficiency reserves

Question 2

How to compute Life Insurance company taxable income (LICTI)

Answer 2

LICTI = Gross Income - Deductions

Question 3

Definition of Gross Income

Answer 3

Gross Income = sum of:

1. Premiums
2. Decrease in tax reserves
3. All other stat income items not included above, such as investment income

Question 4

definition of Total Deductions

Answer 4

Deductions = General Deductions + Small LIC deduction

General Deduction =

• DB and other benefit paid
• IBNR
• Net increase in tax reserves
• policyholder dividends
• Dividends received deduction
• Operation Loss Deduction
• considerations paid to reins for assumptions
• tax DAC amortization
• general expenses
• taxes
• fixed asset depreciation

Question 5

Small Life Insurance Company Deductions

Answer 5

• eliminated under TCJA
• Small LIC: assets < 500m at the end of the taxable year
• allowed to deduct up to 60% of tentative LICTI
• deduct 60% up to $3m
• for amounts between $3m to $15m, grade the deduction linearly to 0%
• if LICTI > $15m, Small LIC deduction = 0

Question 6

Dividends received deduction

Answer 6

• companies can deduct 70%, 80%, or 100% of the dividends received based on the owner ship level
• if the DRD != 100% then DRD is the lesser of:
  1. DRD * Dividends received
  2. 80% of taxable income before DRD

Question 7

Accounting for accrual of discount and amortization of premium

Answer 7

market discount

• when a bond is issued at or above par value, and a subsequent purchaser buys below par = market discount
• LICs arent required to accrue market discount for tax purposes
• market discount is taxed as ordinary income at the time of sale

Original Issue Discount:

• when a bond is issued at a price below par = original issue discount (OID)
• OID - accrued for all tax and tax-exempt bonds
• OID on corporate bonds is included in taxable income

Amortization of Bond Premium

• LICs must amortize premium on taxable and tax exempt bonds
• treated as an interest expense deduction
• use constant yield maturity method

Question 8

Tax accounting for policy acquisition expenses

Answer 8

tax DAC - is a % of premium, not based on actual expenses

capitalization rates:

1. 75% annuities
2. 05% group life
3. 70% all other insurance contracts

• tax DAC capitalization in year t = Capitalization rate * net premium, in yr t
• amortized over 10 years

-Net Premium = GPs - Return Prem - negative of consideration to reins agreements

exclude the following form net premium use in tax DAC:

• deferred / uncollected premium
• PH divs
• waived premium
• premiums paid using partial surrenders

Question 9

FIT: GAAP vs STAT

Answer 9

GAAP:
Temporary difference = difference between GAAP reporting value and the tax basis of assets and liabilities
-taxable temp differences: those that give rise to future taxable amounts
-deductible temp differences: those that give rise to future deductible amounts

STAT
Gross deferred tax assets = sum of:
1. FIT paid in prior years that can be recovered via loss carrybacks for existing temp differences that reverse by the end of the subsequent year
2. gross deferred tax assets that can be offset against the deferred existing gross tax liabilities

key difference: STAT deferred tax assets will be higher because there is no DAC carried on STAT balance sheets