Chapter 12 Flashcards
Taxation Of Insurance Companies In General
Qualification as a Life Insurance Company
- More than 50 percent of an insurance company’s total reserves must be life reserves or unearned premiums and unpaid losses on guaranteed renewable or noncancelable accident and health (A&H) policies.
Life insurance reserves for this purpose are based on statutory amounts and by definition must be:
(1) based on mortality or morbidity tables;
(2) based on assumed rates of interest;
(3) required by law; and
(4) set aside to meet future unaccrued claims.
Total reserves include the following items:
• Life reserves
• Unearned premium and unpaid losses on guaranteed renewable and noncancelable A&H policies
• Unearned premiums and unpaid losses not included above
• All other reserves required by law
Total reserves exclude deficiency reserves and amounts set aside not involving life contingencies.
Taxation Of Insurance Companies In General
Determination of Life Insurance Company Taxable
Income (LICTI). Taxable Income?
- Taxable income of a life insurance company is overall income, which is simply gross income less deductions.
Gross income consists of premiums, decreases in reserves, and other amounts including investment income.
Gross Income for tax purposes
- Gross income consists of premiums, decreases in reserves, and other amounts including investment income.
Gross Income for tax purposes (consists of premiums, decreases in reserves, and other amounts including investment income)
Decreases in Certain Reserves
Decreases in certain reserves during the year are included as part of the gross income amount.
The increases in such reserves are deductible from gross income.
Gross Income for tax purposes (consists of premiums, decreases in reserves, and other amounts including investment income)
Other Amounts
All amounts of gross income not included in computing investment yield, premiums, or decreases in reserves are included as part of the gross income amount. This is a catch all provision to include all other items that are not included under any other section.
Taxable income of a life insurance company is overall income, which is simply gross income less deductions.
Deductions (General and Small Life insurance Company Deduction)
General Deduction?
Deductions are comprised of the general deductions and a small life insurance company deduction.
General Deductions • Death and Other Policy Benefits. • Net Increases in Policy Benefit Reserves. • Policyholder Dividends. • Dividends Received Deduction
*Generally, to qualify, the stock with respect to
which the dividends are received must be held for more than 45 days. Dividends Received Deduction from Gross income:
Percentage Ownership Discount
less 20% 70%
20 - less 80% 80%
over 80% 100%
Dividends from 80 percent owned subsidiaries are eligible for full exclusion (100 percent of dividends) unless such dividends are funded out of tax-exempt interest or out of dividends earned by the subsidiary which are not eligible for the 100 percent dividends received deduction (see discussion below under “Proration”).
Taxable income of a life insurance company is overall income, which is simply gross income less deductions.
Deduction
Operations Loss Deduction (OLD)?
- An operations loss means the excess of life insurance deductions over life insurance gross income for a taxable year.
- Life insurance company
that operating loss for the taxable year must first be offset (carried back) against taxable income of that insurance company of the 3 immediately preceding taxable years (carry-back period) resulting in a potential refund of tax. To the extent that taxable income in the carry-back period is not sufficient to absorb the operations loss carry-back, the excess of the operations losses over the offset amount may be carried over against taxable income of the 15 years following the loss year.
A new life insurance company is permitted an 18-year carryover period with respect to OLDs incurred in its first 5 taxable years.
Taxable income of a life insurance company is overall income, which is simply gross income less deductions.
Deductions (General and Small Life insurance Company Deduction)
Special Deduction?
Small Life Insurance Company Deduction
A small life insurance company is entitled to deduct up to 60 percent of its tentative Life Insurance Company Taxable Income (LICTI).
As tentative LICTI increases from $3 million to $15 million, this small company deduction is phased out at a rate of 15 percent of each dollar of additional tentative LICTI in that range.
To qualify as a small life insurance company, the assets of the company and all of its affiliates must be less than $500 million at the close of the taxable year.
Deductions
Policy Acquisition Expenses
Insurance companies are required to capitalize and amortize their policy acquisition expenses (commonly referred to as deferred acquisition costs (DAC).
- Generally, the amount capitalized can be amortized over 10 years. However, in the case of certain small insurance companies, the amortization period is 60 months.
Definitions and Special Provisions
Section 848 applies to specified insurance contracts, which are defined as any life insurance contract, annuity contract, noncancelable or guaranteed renewable A&H contract, and any combination contract. The capitalization rates are:
• 1.75 percent for annuity contracts
• 2.05 percent for group life contracts
• 7.70 percent for all other specified insurance contracts.
Deductions
Policy Acquisition Expenses
Group Life Contract. A group life contract must meet several requirements to be eligible for the 2.05 percent capitalization rate. Failure to meet these requirements will result in the premium being subject to the 7.7 percent capitalization rate. The requirements are:
• The contract must be a group life insurance contract under the applicable law.
• Coverage must be provided under a master contract.
• Premiums must be reported as group or credit life insurance premiums in the Annual Statement.
• The contract must meet the group affiliation test.
• Premiums must be determined on a group basis.
• Policy proceeds cannot be payable to the insured’s employer or an organization or association to which the insured belongs.
- A group life contract will not be disqualified if up to 5 percent of the premiums fail the above standard, and only the “failed premiums” will be subject to the higher capitalization rate
Deductions
Claim Reserves on cancelable A&H Policies
life insurers are required to reduce their deduction for unearned premium reserves (UPR) held under cancelable A&H policies and other nonlife reserves by 20 percent (such as group and individual cancelable A&H).
Deductions
Special Rules in Calculating Life Reserves
Where a prevailing table changes, the old one may be continued for policies issued during the following 3 years.
If no commissioner’s standard table is available, the regulations will indicate the appropriate table to use.
For contracts issued before 1948 and where there was no commissioner’s standard table, the table used in computing statutory reserves will be used for tax purposes.
Where two or more prevailing tables exist, the one that produces the lowest reserve must be used.
Deductions
Substandard Risks
if a policy obligation is considered a qualified substandard risk, the reserve thereunder will be computed as if under a separate contract. The reserve for this purpose, however, is not the statutory reserve but the reserve computed using the federally prescribed standards.
A substandard risk is considered qualified if:
• A separate reserve is maintained for such risks
• A separately identified premium or charge exists for such risks
• The net surrender is not affected by the existence of such risks
• The net surrender is not regularly used to pay premium charges for such risks
Deductions
Change in Reserve Basis
A life company that changes its basis for computing any of the six enumerated reserves is required to reflect that change in basis in taxable income over a 10-year period commencing with the year following the change. Should the company cease to be a life insurance company at any point during that 10-year period or go out of existence, the balance of the strengthening which had not been reflected in income will be claimed as a deduction at that time.
Deductions
Reserves: Special Elections
Pursuant to a special election, a “qualified” life insurer could have elected to continue to use statutory reserves for tax purposes for contracts issued before 1984. A qualified company is one that had assets of less than $100 million as of December 31, 1983 determined under rules applicable to the small company deduction. Where such a company made the election and had no more than $3 million of tentative LICTI in 1984, it could make a second election to use statutory reserves on contracts issued from January 1, 1984 through December 31, 1988.
