Tax Cuts and Jobs Act, Section 3703: Computation of life insurance tax reserves

[Actuary321]

So it turns out that there is still a cash value floor with the 92.xx% of Stat rate. Good to know.

[campbell]

https://www.soa.org/prof-dev/events/2018-tax-reform/

Tax Reform Webcast: How Does It Affect the Life Insurance Industry?

Date

March 09, 2018

Competency (Learn more)

External Forces & Industry Knowledge


Event Home | Registration | Presenter & Moderator | CPD



Presented by

Taxation Section

Time

Noon–1:30 p.m. ET

Location

This webcast takes place via the Internet.

Registration Fees

Starting at $119 (includes access to subsequent webcast recording). More information on all registration fees.

Who Should Participate

Members of the Financial Reporting, Product Development, Smaller Insurance Company, and Taxation sections and all others with an interest in the impact of federal tax reform on the life insurance industry.

Description

This webinar will look at changes included in the tax reform bill signed by President Trump on Dec. 22, 2017, which impact the life insurance industry. Changes include tax reserves and other company taxation including DAC taxes and international impacts. A current overview will be given as well as thoughts about the process for future developments.

Thinking of signing up for this one.

[Actuary321]

So I heard that the stat reserve you use is the minimum statutory reserve and that you would subtract deferred premium from it. But the Cash Value would be the actual cash value.

What say you all?

[Olrich]

Yes, cash value would be actual cash value. There was a presentation at LAS that might be of interest, tax reform stuff starts on page 21

https://www.soa.org/pd/events/2018/l...ession-026.pdf

[1695814]

edit: Oh, this is for life insurance company taxable income in 2017 and prior.

FAQ on Life Insurance Tax Reserve Methods and Assumptions
Prepared by the Tax Work Group of the Life Practice Council of the
American Academy of Actuaries
May 2018
http://www.actuary.org/files/publica...ssumptions.pdf

[1695814]

This is the (new) current code, afaict: http://uscode.house.gov/view.xhtml?h...false%7Cprelim

[1695814]

Originally Posted by urysohn

The "tax reserve method" as defined in Section 807 is just "CRVM" or "CARVM", not the interest and mortality used, even though that's how we tend to think of the "method"

Originally Posted by Steve Grondin

Yes. Typically we use the word "basis" to describe the combination of method, interest, mortality, and timing (curtate/continuous/etc) that is used to compute the reserves. Although I haven't seen the actual text, it sounds as if the Federally Prescribed Reserve is being redefined as 92.81% of the stat reserve (for general account reserves).

I'm slightly confused...because in the text it doesn't specifically say "92.81% of statutory reserve"...it says (concatenating & paraphrasing) "92.81% of [the reserve] determined by using the tax reserve method which is CRVM for Life insurance." Of course, one uses CRVM for life insurance, so you're saying the same thing, I think. Do we just assume that interest, mortality, & timing come along for the ride (i.e., Tax uses the same as Stat)?

[echo]

Originally Posted by 1695814

I'm slightly confused...because in the text it doesn't specifically say "92.81% of statutory reserve"...it says (concatenating & paraphrasing) "92.81% of [the reserve] determined by using the tax reserve method which is CRVM for Life insurance." Of course, one uses CRVM for life insurance, so you're saying the same thing, I think.

I think it is the minimum required statutory reserve, not the statutory reserve. For statutory reserves, you are always allowed to hold greater than the minimum AFAIK. In practice, I think most hold the minimum required.

[sKansKi]

Originally Posted by urysohn

It's inforce and new business. But there's an additional paragraph that says the change in the inforce tax reserve is to be spread over an 8-year period. i.e. that you can include 1/8 of the difference as a deduction for the next 8 years.

This one has me confused.

Using number guy's link...

Originally Posted by 1695814

This is the (new) current code, afaict: http://uscode.house.gov/view.xhtml?h...false%7Cprelim

...near the bottom in the section titled "Effective Date of 2017 Amendment" it talks about the transition rule & relief.

I'll just post it here with my comments in blue:

"(3) Transition relief.-

"(A) In general.-If-

"(i) tax reserve under the old law the reserve determined under section 807(d) of the Internal Revenue Code of 1986 (determined after application of paragraph (2)) with respect to any contract as of the close of the year preceding the first taxable year beginning after December 31, 2017, differs from

"(ii) tax reserve under the new law the reserve which would have been determined with respect to such contract as of the close of such taxable year under such section determined without regard to paragraph (2),

then the difference between the amount of the reserve described in clause (i) and the amount of the reserve described in clause (ii) shall be taken into account under the method provided in subparagraph (B).

"(B) Method.-The method provided in this subparagraph is as follows:

"(i) If the amount determined under subparagraph (A)(i) exceeds the amount determined under subparagraph (A)(ii), 1/8 of such excess shall be taken into account, for each of the 8 succeeding taxable years, as a deduction under section 805(a)(2) or 832(c)(4) of such Code, as applicable.

"(ii) If the amount determined under subparagraph (A)(ii) exceeds the amount determined under subparagraph (A)(i), 1/8 of such excess shall be included in gross income, for each of the 8 succeeding taxable years, under section 803(a)(2) or 832(b)(1)(C) of such Code, as applicable."

Let's say that at 12/31/2018 the Tax reserve on my 2017 & prior issues will be 1,000,000 under the old method, and assume it's going to be 920,000 under the new method.

Is my deduction for the next eight years a flat 80k/8 = 10,000? Is it really that simple or am I reading that section incorrectly?

What happens if a large chunk of those policies lapse/die? Do I still get to keep taking that 10,000 deduction?

[bdschobel]

Originally Posted by sKansKi

...Let's say that at 12/31/2018 the Tax reserve on my 2017 & prior issues will be 1,000,000 under the old method, and assume it's going to be 920,000 under the new method.

Is my deduction for the next eight years a flat 80k/8 = 10,000? Is it really that simple or am I reading that section incorrectly?

What happens if a large chunk of those policies lapse/die? Do I still get to keep taking that 10,000 deduction?

The test is applied on a policy-by-policy basis. Any difference on 12/31/2018 is spread over 8 years. If a policy lapses or the insured dies during that period, then the entire reserve is released, making the transitional computation irrelevant.

Bruce