Tax Reserves on Life Insurance in US

[Joined10MinBefore911Hit]

Can anybody point me to where in the reading that tax reserves are computed? I thought it would be in the tax study note. It wasn't.

[Anonymous]

If you are talking about SoA5, then I know that LIP&F chapter six talks about reserves. However to me the description of the reserve (solvency, tax, earnings) calculation is not very straight forward.

[Anonymous]

Tax reserves:

Calculation Method required by IRS since 1984
Tax Refom Act

1. Calculate a 'test reserve ' called Federaly Prescribed Reserve (FPR) using Solvency reserve formula but with higher interest rate and ultimate mortality.

2. Calculate MIN(FPR, Solvency)

3. Tax Reserve=MAX[(2. above),Cash Value]

step 3 means Tax Reserve >= Cash Value.

Tax reserves usually less than Solvency.

Reserves are a liability .

A liability is a reduction to taxable income.

1984 method gives you less of a reduction and thus a higher taxable income.