Income Tax Definition of Life Insurance and Annuity Contracts (Portfolio 528)

Description

Bloomberg Tax Portfolio 528 T.M., Income Tax Definition of Life Insurance and Annuity Contracts, addresses the definition of a life insurance or annuity contract for federal tax purposes. This Portfolio considers when a contract is treated as a life insurance contract for federal tax purposes, including when a contract is subject to the special rules applicable to a life insurance contract that also constitutes a modified endowment contract, or “MEC”. This Portfolio also discusses various types of annuity contracts. In addition, this Portfolio addresses the diversification requirements and so-called “investor control” doctrine that apply to variable life insurance and annuity contracts, and discusses life insurance and annuity contract that provide long-term care coverage.

This Portfolio does not consider the federal income tax rules applicable to life insurance and annuity contracts, for example, the exclusion from gross income of death benefit proceeds and the taxation of annuity payments; deductions related to the purchase of life insurance policies and annuity contracts; the federal income tax rules applicable to dispositions of life insurance policies and annuity contracts; international aspects; and valuation. These rules are discussed in Bloomberg Tax Portfolio 529 T.M., Taxation of Life Insurance and Annuity Products. In addition, a discussion of the taxation of the issuer of the contract, generally a life insurance company subject to special tax rules in Subchapter L of the Code, is beyond the scope of this Portfolio.

As life insurance and annuity products are used in a variety of contexts, the tax treatment of these products is an issue that arises under a broad array of Code sections. For example, these products may be used in the qualified retirement plan context and thus raise tax issues under Subchapter D of the Code, and may be used generally in the compensation context. These products are also commonly used in the context of estate and gift tax planning, thus raising tax issues under Subtitle B of the Code.

This Portfolio focuses on the federal income tax definition of “nonqualified” life insurance and annuity products. Life insurance and annuity tax issues relating to qualified retirement plans, employee compensation, and to estate and gift tax rules are covered in other Bloomberg Tax Portfolios. See, e.g., 386 T.M., Insurance-Related Compensation, and 826 T.M., Life Insurance.Similarly, this Portfolio focuses on life insurance and annuity contracts issued by commercial insurance companies. A discussion of “private” annuities can be found in 805 T.M., Private Annuities and Self-Canceling Installment Notes.

This Portfolio may be cited as Griffin, Springfield, Keene, and Peak, 528 T.M., Income Tax Definition of Life Insurance and Annuity Contracts.

Table of Contents

I. What Is Insurance?
II. What is a Life Insurance Contract?
III. What is a Modified Endowment Contract (or ‘MEC’)?
IV. What Constitutes an Annuity Contract?
V. Variable Contracts
VI. Accelerated Death Benefits and Long-Term Care Insurance Riders