[Date Prev][Date Next][Thread Prev][Thread Next][Date Index][Thread Index]
[lmi-commits] [lmi] master 45c509a 4/5: Add a 7702 footnote
|
From: |
Greg Chicares |
|
Subject: |
[lmi-commits] [lmi] master 45c509a 4/5: Add a 7702 footnote |
|
Date: |
Fri, 12 Feb 2021 11:53:49 -0500 (EST) |
branch: master
commit 45c509acf07dea11b793a38884ddbfa0feecfd0b
Author: Gregory W. Chicares <gchicares@sbcglobal.net>
Commit: Gregory W. Chicares <gchicares@sbcglobal.net>
Add a 7702 footnote
Copied footnote 32 and its reference, into the obvious places, altered
the text, and renumbered, resulting in a new footnote 33.
---
7702.html | 225 +++++++++++++++++++++++++++++++-------------------------------
1 file changed, 114 insertions(+), 111 deletions(-)
diff --git a/7702.html b/7702.html
index f2c9582..1652b25 100644
--- a/7702.html
+++ b/7702.html
@@ -935,18 +935,9 @@ and 4% for
all CVAT and §7702A calculations except that the necessary
premium for guideline contracts is defined in terms of the
guideline limit. Beginning in 2021, H.R. 6800 provided for those
-rates to vary, depending on certain published values.
-<!-- [draft of a new footnote] Prevalent
-industry opinion holds that statutory interest should be treated
-as an aspect of plan code: determined on the issue date, and not
-changing thereafter (except in the case of a "deemed exchange":
-see Adney et al., "They Go Bump in the Night",
-Society of Actuaries, Taxing Times Supplement May 2012).
-This is the way mortality is conventionally treated. For example,
-the interest and mortality basis of a 2001 CSO contract with a
-4% CVAT rate would not change to 2017 CSO or 2% due to an
-adjustment event or material change in 2021.
--->
+rates to
+vary<a href="#fn33" name="fr33" title="">[33]</a>,
+depending on certain published values.
</p>
<p>
@@ -956,7 +947,7 @@ guaranteed interest rate is determined from the contract,
and the statutory rate is used instead if it is greater.
This operation is performed separately for all periods with
different guaranteed
-rates<a href="#fn33" name="fr33" title="">[33]</a>.
+rates<a href="#fn34" name="fr34" title="">[34]</a>.
For example, if the guaranteed
rate is 4.5% for five years and 3.5% thereafter, then the
GLP interest rate is 4.5% for five years and 4.0%
@@ -974,7 +965,7 @@ no less than the general-account guaranteed rate.
the GSP, the CVAT NSP, and the §7702A NSP, seven-pay
premium, and DCV.
They may be ignored as de minimis in calculating the §7702
-GLP<a href="#fn34" name="fr34" title="">[34]</a>,
+GLP<a href="#fn35" name="fr35" title="">[35]</a>,
but only as long as they last no longer than one year.
Only guarantees that either last
longer than one year or are present on the issue date are
@@ -983,7 +974,7 @@ future period lasting no longer than one year is a dividend,
not an adjustment event.
Here, “issue” excludes cases where
the contract is merely deemed by statute to be
-reissued<a href="#fn35" name="fr35" title="">[35]</a>.
+reissued<a href="#fn36" name="fr36" title="">[36]</a>.
</p>
<p>
@@ -1011,10 +1002,10 @@ specified in the contract itself: charges imposed by
separate accounts cannot be deducted unless they are
specified in the life insurance contract proper, since any
charge not so specified is deemed to be
-zero<a href="#fn36" name="fr36" title="">[36]</a>.
+zero<a href="#fn37" name="fr37" title="">[37]</a>.
They also must not exceed the charges reasonably expected to be
actually
-imposed<a href="#fn37" name="fr37" title="">[37]</a>.
+imposed<a href="#fn38" name="fr38" title="">[38]</a>.
If the schedule page announces a charge
of “up to 100 basis points” and we actually charge 50 bp and
expect to keep charging that, then we can use 50 bp; but if
@@ -1027,7 +1018,7 @@ and never rounded down or truncated.
The GPT is a
bright-line test, and truncation at, say, eight decimal places
may have an effect of more than a dollar per
-thousand<a href="#fn38" name="fr38" title="">[38]</a>
+thousand<a href="#fn39" name="fr39" title="">[39]</a>
at a later duration.
Special attention must be paid to the exact
method the administration system uses (e.g. beginning of
@@ -1060,7 +1051,7 @@ Addendum (¶B/8).
9 On the other hand, it is not clear that a classical mortality
and expense charge (M&E) can be reflected, because it is part
of the daily unit
-value<a href="#fn39" name="fr39" title="">[39]</a>
+value<a href="#fn40" name="fr40" title="">[40]</a>
calculation.
The effect of this M&E on monthly interest is a function of
the ratio of successive unit values, and the actual charge
@@ -1167,7 +1158,7 @@ provides.
The mortality tables specified in the safe harbor
vary by gender (except that unisex rates may be used for
females, but only where required by state
-law<a href="#fn40" name="fr40" title="">[40]</a>)
+law<a href="#fn41" name="fr41" title="">[41]</a>)
and, if prescribed in the contract, by tobacco use.
</p>
@@ -1180,7 +1171,7 @@ mortality is greater (as for some guaranteed-issue and
simplified-issue contracts).
<tt>lmi</tt> does not support contracts
that guarantee mortality lower than the safe
-harbor<a href="#fn41" name="fr41" title="">[41]</a>.
+harbor<a href="#fn42" name="fr42" title="">[42]</a>.
</p>
<p>
@@ -1266,7 +1257,7 @@ to impose are reflected in guideline premiums and the
CVAT DCV.
Higher guaranteed charges are disregarded.
Originally,
guaranteed charges were allowed, but the statute was changed in
-1988<a href="#fn42" name="fr42" title="">[42]</a>
+1988<a href="#fn43" name="fr43" title="">[43]</a>
due to perceived abuses.
Expense charges are
ignored for the CVAT net single premium and for the net
@@ -1274,7 +1265,7 @@ single and seven-pay premiums used for MEC testing.
However, they are always taken into account for necessary premium
calculations.
Furthermore, charges for
-QABs<a href="#fn43" name="fr43" title="">[43]</a>
+QABs<a href="#fn44" name="fr44" title="">[44]</a>
may always be reflected in all calculations.
</p>
@@ -1284,7 +1275,7 @@ total assets
(which can change on every valuation date), it is convenient
to select a charge amount low enough that it will never need
to be changed, or conservatively to disregard the charge
-altogether<a href="#fn44" name="fr44" title="">[44]</a>.
+altogether<a href="#fn45" name="fr45" title="">[45]</a>.
<tt>lmi</tt> applies the lowest current tiered rate (cf.
¶7/6) for all guideline premium calculations, but uses the
actual current charge for the CVAT DCV.
@@ -1317,15 +1308,15 @@ but affected e.g. by smoker-to-nonsmoker changes).
§7702 interest, mortality, and (if applicable) expense basis
at each duration must be at least as conservative as the
basis that actually determines the guaranteed value at each
-duration<a href="#fn45" name="fr45" title="">[45]</a>.
+duration<a href="#fn46" name="fr46" title="">[46]</a>.
An exact calculation must be done for each month
and for each possible combination of issue age, underwriting
class, and so
-on<a href="#fn46" name="fr46" title="">[46]</a>.
+on<a href="#fn47" name="fr47" title="">[47]</a>.
The practical difficulty of these calculations might be mitigated
by using the more conservative basis for all durations, and by
using the CVAT instead of the
-GPT<a href="#fn47" name="fr47" title="">[47]</a>.
+GPT<a href="#fn48" name="fr48" title="">[48]</a>.
</p>
<p>
@@ -1334,7 +1325,7 @@ CSV of at least zero as long as the GLP is paid each year.
This guarantee may be disregarded under §7702 to the
extent that the guarantee premium exactly equals the GLP;
but if it is calculated in any other
-way<a href="#fn48" name="fr48" title="">[48]</a>,
+way<a href="#fn49" name="fr49" title="">[49]</a>,
then ¶10/1
applies, requiring potentially onerous calculations.
</p>
@@ -1362,7 +1353,7 @@ A QAB’s benefit is
deemed to be the stream of current charges for the QAB, but
only over the period during which such charges are payable
as established in the
-contract<a href="#fn49" name="fr49" title="">[49]</a>.
+contract<a href="#fn50" name="fr50" title="">[50]</a>.
Thus, the QAB’s charges
create a level positive increment to the guideline premiums
for that charge period, with appropriate effects on the
@@ -1371,7 +1362,7 @@ At the end of that period, the
increment goes away, even if the QAB’s benefits continue;
this is neither an adjustment event, nor a material change,
nor a §7702A(c)(2)(A) decrease in
-benefits<a href="#fn50" name="fr50" title="">[50]</a>.
+benefits<a href="#fn51" name="fr51" title="">[51]</a>.
Thus, QABs may
not be funded through contract maturity unless their charges
continue through maturity.
@@ -1382,20 +1373,20 @@ continue through maturity.
benefits are completely disregarded if their charges cannot
flow through the AV, in which case the charges are paid in
cash and do not count as
-premium<a href="#fn51" name="fr51" title="">[51]</a>.
+premium<a href="#fn52" name="fr52" title="">[52]</a>.
Otherwise, payments
to support them count against the premium limit, and their
charges decrease the AV (and, hence, the CSV and corridor
DB) without directly increasing any payment limit—although
they do decrease the
-DCV<a href="#fn52" name="fr52" title="">[52]</a>.
+DCV<a href="#fn53" name="fr53" title="">[53]</a>.
That outcome can be avoided by
stipulating that the charges must be paid in cash and cannot
be deducted from the AV.
At any rate, no change in a
non-qualified additional benefit is an adjustment event, a
material change, or a §7702A(c)(2)(A)
-decrease<a href="#fn53" name="fr53" title="">[53]</a>.
+decrease<a href="#fn54" name="fr54" title="">[54]</a>.
</p>
<p>
@@ -1428,7 +1419,7 @@ than current rider charges.
For a term rider treated as
death benefit, §7702 calculations reflect the actual benefit
duration, but §7702A calculations deem the benefit to last until
-maturity<a href="#fn54" name="fr54" title="">[54]</a>.
+maturity<a href="#fn55" name="fr55" title="">[55]</a>.
</p>
<p>
@@ -1441,10 +1432,10 @@ of the contract; but expiry at a date set in the
contract at
issue is not (¶11/2).
In particular, there is an adjustment
event when a spouse or child term rider terminates due to their
-death<a href="#fn55" name="fr55" title="">[55]</a>,
+death<a href="#fn56" name="fr56" title="">[56]</a>,
but not when such a term rider terminates due
to the family member’s attainment of a specified expiry
-age<a href="#fn56" name="fr56" title="">[56]</a>.
+age<a href="#fn57" name="fr57" title="">[57]</a>.
Revising or removing a rating on a QAB (for example, an
occupational accidental death rating) is an adjustment event
unless the rating was disregarded in §7702 calculations.
@@ -1480,7 +1471,7 @@ benefit, ¶11/5 notwithstanding, and not as a QAB
because the
automatic conversion preserves the total DB with no action
on the owner’s part and a positive election is required to
obtain any different
-outcome<a href="#fn57" name="fr57" title="">[57]</a>.
+outcome<a href="#fn58" name="fr58" title="">[58]</a>.
Termination of this rider, e.g.
because there is insufficient AV to pay its monthly cost,
is an adjustment event and a §7702A(c)(2)(A) decrease,
@@ -1585,15 +1576,15 @@ It is advantageous to make the necessary-premium
and guideline-premium limits identical so that the former
need not be calculated separately: then no unnecessary
premium can be paid without failing the definitional
-test<a href="#fn58" name="fr58" title="">[58]</a>.
+test<a href="#fn59" name="fr59" title="">[59]</a>.
To this end, the server offers two different methods.
In order to avoid certain difficulties that might otherwise
-occur<a href="#fn59" name="fr59" title="">[59]</a>,
+occur<a href="#fn60" name="fr60" title="">[60]</a>,
the first method
treats every adjustment event as a material change, and
therefore applies both the rollover rule and the reduction
rule to decrease
-adjustments<a href="#fn60" name="fr60" title="">[60]</a>.
+adjustments<a href="#fn61" name="fr61" title="">[61]</a>.
The second method simply
assumes that such difficulties do not arise; it treats
adjustment events as reductions when they decrease benefits,
@@ -1604,7 +1595,7 @@ and as material changes otherwise.
3 Decreases are subject to retrospective seven-pay testing,
whether or not an adjustment event has occurred.
Premature
-termination<a href="#fn61" name="fr61" title="">[61]</a>
+termination<a href="#fn62" name="fr62" title="">[62]</a>
of a QAB is treated as a decrease.
</p>
@@ -1613,7 +1604,7 @@ of a QAB is treated as a decrease.
might not coincide with any policy year.
Underwriting procedures should guard against abuse such as a
series of trivial changes on successive
-days<a href="#fn62" name="fr62" title="">[62]</a>.
+days<a href="#fn63" name="fr63" title="">[63]</a>.
</p>
<h2>
@@ -1987,7 +1978,7 @@ which may not be a policy anniversary.
<p>
Least death benefit (LDB) is the lowest death benefit
(including any QABs) in the most recent seven-year test
-period<a href="#fn63" name="fr63" title="">[63]</a>.
+period<a href="#fn64" name="fr64" title="">[64]</a>.
</p>
<p>
@@ -2001,10 +1992,10 @@ When a contract is issued
<p>
Calculate the seven-pay premium as
<br>
- <sub><small>7</small></sub>P<sub><small>x</small></sub>
× DB + amortized QAB charges<a href="#fn64" name="fr64" title="">[64]</a>
+ <sub><small>7</small></sub>P<sub><small>x</small></sub>
× DB + amortized QAB charges<a href="#fn65" name="fr65" title="">[65]</a>
<br>
using the initial DB defined in our GPT
-specifications<a href="#fn65" name="fr65" title="">[65]</a>.
+specifications<a href="#fn66" name="fr66" title="">[66]</a>.
Round it down if at all.
</p>
@@ -2045,13 +2036,13 @@ Recalculate the seven-pay premium with the formula
<br>
used for material changes, with t naturally equal to zero.
Test for unnecessary
-premium<a href="#fn66" name="fr66" title="">[66]</a>.
+premium<a href="#fn67" name="fr67" title="">[67]</a>.
</p>
<p>
When the exchanged funds are ultimately received, reissue
the policy reflecting the actual §1035
-amount<a href="#fn67" name="fr67" title="">[67]</a>,
+amount<a href="#fn68" name="fr68" title="">[68]</a>,
and retest
from the original issue date.
</p>
@@ -2062,7 +2053,7 @@ When a premium is paid
<p>
During every seven-year test period, test each
-“amount paid”<a href="#fn68" name="fr68" title="">[68]</a>
+“amount paid”<a href="#fn69" name="fr69" title="">[69]</a>
(except any §1035 amount) against the
seven-pay premium limit.
The limit, measured on each day
@@ -2095,7 +2086,7 @@ Round it down if at all.
Necessary premium is NSP adjusted for the cash value.
Normally the adjustment equals DCV.
Whenever CSV is lower than DCV, use CSV
-instead<a href="#fn69" name="fr69" title="">[69]</a>,
+instead<a href="#fn70" name="fr70" title="">[70]</a>,
but don’t change DCV.
If the adjustment is less than zero, then use zero instead.
Thus:
@@ -2146,12 +2137,12 @@ Update DCV for CVAT contracts.
Accumulate it like AV, but using §7702 assumptions.
Reflect the actual death benefit option.
Use current charges and
-loads<a href="#fn70" name="fr70" title="">[70]</a>.
+loads<a href="#fn71" name="fr71" title="">[71]</a>.
Use §7702 interest and mortality.
Reflect all transactions, but ignore
-loans<a href="#fn71" name="fr71" title="">[71]</a>.
+loans<a href="#fn72" name="fr72" title="">[72]</a>.
Disregard charges for nonqualified additional
-benefits<a href="#fn72" name="fr72" title="">[72]</a>.
+benefits<a href="#fn73" name="fr73" title="">[73]</a>.
Add any extra amounts payable on surrender such as refundable
sales loads but do not accumulate those amounts at interest.
Round it up if at all.
@@ -2166,7 +2157,7 @@ When a material change occurs
<p>
Process material changes as of the very day they take
effect, and not as of any other
-date<a href="#fn73" name="fr73" title="">[73]</a>.
+date<a href="#fn74" name="fr74" title="">[74]</a>.
</p>
<p>
@@ -2183,7 +2174,7 @@ to the material change.
<p>
Calculate a new seven-pay
-premium<a href="#fn74" name="fr74" title="">[74]</a>
+premium<a href="#fn75" name="fr75" title="">[75]</a>
as
<br>
<sub><small>7</small></sub>P<sub><small>x+t</small></sub>
× (DB − CSV ÷ A<sub><small>x+t</small></sub>) + amortized
QAB charges
@@ -2199,7 +2190,7 @@ Round it down if at all.
If the new seven-pay premium is negative, set it to zero.
In this case, the contract does not become a MEC, but no
premium can be paid for seven
-years<a href="#fn75" name="fr75" title="">[75]</a>.
+years<a href="#fn76" name="fr76" title="">[76]</a>.
</p>
<p>
@@ -2235,11 +2226,11 @@ period has ended.
<p>
Update LDB and each QAB’s benefit amount to reflect
decreases
-only<a href="#fn76" name="fr76" title="">[76]</a>.
+only<a href="#fn77" name="fr77" title="">[77]</a>.
If one of these items increases while
another one decreases, then process a material change and
skip the rest of this
-step<a href="#fn77" name="fr77" title="">[77]</a>.
+step<a href="#fn78" name="fr78" title="">[78]</a>.
</p>
<p>
@@ -2267,7 +2258,7 @@ survivorship contracts.
If premium exceeds the new seven-pay limit at any time during the
retrospective seven-year test period, then the contract becomes a
MEC as of the current
-date<a href="#fn78" name="fr78" title="">[78]</a>.
+date<a href="#fn79" name="fr79" title="">[79]</a>.
</p>
<h3>
@@ -2316,7 +2307,7 @@ Correction of a misstatement of age or gender is a
material
change.
Consult the actuarial department when this occurs.
An irremediable MEC may
-result<a href="#fn79" name="fr79" title="">[79]</a>.
+result<a href="#fn80" name="fr80" title="">[80]</a>.
</p>
<p>
@@ -2324,7 +2315,7 @@ Removing a substandard rating is a material change if the
rating was reflected in §7702A calculations.
So is a change from smoker to nonsmoker, if that distinction was
reflected in §7702A
-calculations<a href="#fn80" name="fr80" title="">[80]</a>.
+calculations<a href="#fn81" name="fr81" title="">[81]</a>.
</p>
<p>
@@ -2343,7 +2334,7 @@ if somewhat impractical illustration strategy when every
SA
increase is recognized as a material change.
But when payment of unnecessary premium is the only
material-change trigger, that strategy no longer works very
-well<a href="#fn81" name="fr81" title="">[81]</a>.
+well<a href="#fn82" name="fr82" title="">[82]</a>.
Unnecessary premium paid during a
seven-year test period typically violates the seven-pay
limit, producing a MEC.
@@ -2422,7 +2413,7 @@ Others may skip it.
inadequately appreciated.
It permits the calculation of any
isolated annual value without iteration in many important
-cases<a href="#fn82" name="fr82" title="">[82]</a>.
+cases<a href="#fn83" name="fr83" title="">[83]</a>.
Account values can be conveniently determined by
applying the prospective formula for terminal reserves.
</p>
@@ -3029,49 +3020,61 @@ credited during the year cannot be known in advance.
</p>
<p>
[<a name="fn33" href="#fr33">33</a>]
-DEFRA Blue Book, page 648.
+Prevalent industry opinion holds that statutory interest should be
+treated as an aspect of plan code: determined on the issue date, and
+never changing thereafter (except in the case of a "deemed exchange":
+see Adney et al., "They Go Bump in the Night",
+Society of Actuaries, Taxing Times Supplement May 2012).
+This is the way mortality is conventionally treated. For example,
+the interest and mortality basis of a 2001 CSO contract with a
+4% CVAT rate would not change to 2017 CSO or 2% due to an
+adjustment event or material change in 2021.
</p>
<p>
[<a name="fn34" href="#fr34">34</a>]
-DEFRA Blue Book, page 649.
+DEFRA Blue Book, page 648.
</p>
<p>
[<a name="fn35" href="#fr35">35</a>]
-For example, §7702A(c)(3)(A)(i).
+DEFRA Blue Book, page 649.
</p>
<p>
[<a name="fn36" href="#fr36">36</a>]
-§7702(c)(3)(D)(i).
+For example, §7702A(c)(3)(A)(i).
</p>
<p>
[<a name="fn37" href="#fr37">37</a>]
-§7702(c)(3)(B)(ii).
+§7702(c)(3)(D)(i).
</p>
<p>
[<a name="fn38" href="#fr38">38</a>]
+§7702(c)(3)(B)(ii).
+</p>
+<p>
+[<a name="fn39" href="#fr39">39</a>]
This would not be a “reasonable” approximation: DEFRA Blue
Book, page 653.
</p>
<p>
-[<a name="fn39" href="#fr39">39</a>]
+[<a name="fn40" href="#fr40">40</a>]
In all likelihood, unit values reflect quarterly fund expenses
that are applied to average assets in a way that varies from one
fund to the next, and such expenses aren’t specified in the
contract (¶7/6).
</p>
<p>
-[<a name="fn40" href="#fr40">40</a>]
+[<a name="fn41" href="#fr41">41</a>]
And also in Norris cases, where state law must be read to
conform to Title VII of the Civil Rights Act of 1964.
</p>
<p>
-[<a name="fn41" href="#fr41">41</a>]
+[<a name="fn42" href="#fr42">42</a>]
Guaranteed mortality lower than the safe harbor might
raise state approval issues, for instance in the area of
nonforfeiture.
</p>
<p>
-[<a name="fn42" href="#fr42">42</a>]
+[<a name="fn43" href="#fr43">43</a>]
Public Law 100-647 of 1988 (TAMRA) amended
§7702(c)(3)(B)(ii), which formerly permitted
“any charges…specified in the contract”,
@@ -3079,11 +3082,11 @@ to allow only “reasonable
charges…reasonably
expected to be actually paid”.
</p>
<p>
-[<a name="fn43" href="#fr43">43</a>]
+[<a name="fn44" href="#fr44">44</a>]
§7702(b)(2)(B).
</p>
<p>
-[<a name="fn44" href="#fr44">44</a>]
+[<a name="fn45" href="#fr45">45</a>]
Asset-tiered charges could be reflected exactly at the
cost of extra complexity.
Ignoring them is safe even under
@@ -3091,16 +3094,16 @@ the old-fashioned interpretation that any change in
current
charges is an adjustment event.
</p>
<p>
-[<a name="fn45" href="#fr45">45</a>]
+[<a name="fn46" href="#fr46">46</a>]
DEFRA Blue Book, page 649.
</p>
<p>
-[<a name="fn46" href="#fr46">46</a>]
+[<a name="fn47" href="#fr47">47</a>]
This exhaustive approach is not necessary if a formulaic
approach suffices to cover every possible case.
</p>
<p>
-[<a name="fn47" href="#fr47">47</a>]
+[<a name="fn48" href="#fr48">48</a>]
Alternatively, Desrochers [Transactions of the Society of
Actuaries (TSA) XL, page 209] suggests setting a load equal
to the difference between the GLP and the nonforfeiture
@@ -3110,17 +3113,17 @@ that paper was published rendered this approach of
little or
no practical applicability.
</p>
<p>
-[<a name="fn48" href="#fr48">48</a>]
+[<a name="fn49" href="#fr49">49</a>]
For instance, by using an approximate calculation such as
a table lookup, or by using a different mortality table.
</p>
<p>
-[<a name="fn49" href="#fr49">49</a>]
+[<a name="fn50" href="#fr50">50</a>]
A MEC testing server will need to know the maximum funding
duration and maximum benefit duration for each QAB.
</p>
<p>
-[<a name="fn50" href="#fr50">50</a>]
+[<a name="fn51" href="#fr51">51</a>]
Neither is there any such consequence if a QAB is
terminated, or its benefits increased or decreased, after
the funding period, as long as the current charges remain
@@ -3132,11 +3135,11 @@ would cause NAAR to increase beyond reinsurance
capacity, in
a context similar to ¶6/5.
</p>
<p>
-[<a name="fn51" href="#fr51">51</a>]
+[<a name="fn52" href="#fr52">52</a>]
§7702(f)(5)(C)(ii).
</p>
<p>
-[<a name="fn52" href="#fr52">52</a>]
+[<a name="fn53" href="#fr53">53</a>]
Charges for a non-QAB are treated as any other amount
deducted from a contract: they’re potentially taxable.
Consider a single-premium life contract with a long term
@@ -3145,18 +3148,18 @@ The withdrawals generate taxable income, just as if the
base
policy and the non-QAB were separate entities.
</p>
<p>
-[<a name="fn53" href="#fr53">53</a>]
+[<a name="fn54" href="#fr54">54</a>]
A non-qualified additional benefit is not a benefit at all
under §7702(f)(5)(C)(i).
</p>
<p>
-[<a name="fn54" href="#fr54">54</a>]
+[<a name="fn55" href="#fr55">55</a>]
Perhaps this means that the endowment benefit (¶4/7) could
include the term amount for §7702A only, but we disregard
that reading.
</p>
<p>
-[<a name="fn55" href="#fr55">55</a>]
+[<a name="fn56" href="#fr56">56</a>]
TEFRA Blue Book, page 371: “the guideline premiums are to
be adjusted…if a qualified additional benefit ceases for any
reason, including the death of an individual (such as the
@@ -3169,23 +3172,23 @@ the death triggers a §7702A(c)(2)(A) decrease and a
retrospective MEC.
</p>
<p>
-[<a name="fn56" href="#fr56">56</a>]
+[<a name="fn57" href="#fr57">57</a>]
Presumably the QAB was not funded past its expiry date, so
the quantities B and C would cancel.
</p>
<p>
-[<a name="fn57" href="#fr57">57</a>]
+[<a name="fn58" href="#fr58">58</a>]
PLR 9513015, PLR 9519023, PLR 9741046.
</p>
<p>
-[<a name="fn58" href="#fr58">58</a>]
+[<a name="fn59" href="#fr59">59</a>]
Thus, for instance, increases due to payments under the ROP death
benefit option are not material changes because of the necessary
premium exception.
Cf. ¶5/8.
</p>
<p>
-[<a name="fn59" href="#fr59">59</a>]
+[<a name="fn60" href="#fr60">60</a>]
Treating as material changes only adjustment events that
increase the guideline limit can allow payment of
unnecessary premium under a GPT contract, for instance if
@@ -3218,7 +3221,7 @@ history with respect only to certain changes during the
first fifteen years.)
</p>
<p>
-[<a name="fn60" href="#fr60">60</a>]
+[<a name="fn61" href="#fr61">61</a>]
Applying both rules to decrease adjustments is conservatively
less advantageous to the taxpayer, but seems so extraordinary
on the face of it that some elaboration is in order.
@@ -3232,11 +3235,11 @@ retrospective testing; then process the material
change, using
its seven-pay premium for prospective testing.
</p>
<p>
-[<a name="fn61" href="#fr61">61</a>]
+[<a name="fn62" href="#fr62">62</a>]
Other than on the QAB’s normal expiry date: see ¶11/6.
</p>
<p>
-[<a name="fn62" href="#fr62">62</a>]
+[<a name="fn63" href="#fr63">63</a>]
To prevent systematic abuse, a pro-rata portion of the amount
paid in the old contract year could be deducted from the
seven-pay limit in the first new contract year (cf. ¶5/10).
@@ -3256,7 +3259,7 @@ Any such rule would be added to
the procedures for CVAT MEC testing as well.
</p>
<p>
-[<a name="fn63" href="#fr63">63</a>]
+[<a name="fn64" href="#fr64">64</a>]
§7702A(c)(3)(B)(i) says “the lowest level of the death
benefit and qualified additional benefits payable in the 1st
7 contract years”. But §7702(c)(2)(A) forces that to equal
@@ -3265,59 +3268,59 @@ As long as the benefits are properly updated, LDB is
always the
benefit as of the beginning of the first contract year.
</p>
<p>
-[<a name="fn64" href="#fr64">64</a>]
+[<a name="fn65" href="#fr65">65</a>]
Amortized QAB charges means the present value of QAB
charges divided by a seven-year annuity-due factor,
with the annuity period duly reduced if it would otherwise
extend past maturity.
</p>
<p>
-[<a name="fn65" href="#fr65">65</a>]
+[<a name="fn66" href="#fr66">66</a>]
¶3/1–2
</p>
<p>
-[<a name="fn66" href="#fr66">66</a>]
+[<a name="fn67" href="#fr67">67</a>]
If the net 1035 amount exceeds the necessary premium, we
declare the contract a MEC, though some might hold that it is
not—reasoning, perhaps, that the CVAT corridor saves it.
Cf. the general recommendation in ¶3/1.
</p>
<p>
-[<a name="fn67" href="#fr67">67</a>]
+[<a name="fn68" href="#fr68">68</a>]
¶3/3
</p>
<p>
-[<a name="fn68" href="#fr68">68</a>]
+[<a name="fn69" href="#fr69">69</a>]
¶6/1–2
</p>
<p>
-[<a name="fn69" href="#fr69">69</a>]
+[<a name="fn70" href="#fr70">70</a>]
TAMRA Conference Report, page 105, footnote 3.
</p>
<p>
-[<a name="fn70" href="#fr70">70</a>]
+[<a name="fn71" href="#fr71">71</a>]
¶9/1
</p>
<p>
-[<a name="fn71" href="#fr71">71</a>]
+[<a name="fn72" href="#fr72">72</a>]
TAMRA Conference Report, footnote 3.
Policy loans affect AV in that loaned and unloaned funds
generally earn different rates of interest, but that has no
effect because the DCV interest rate is prescribed by statute.
</p>
<p>
-[<a name="fn72" href="#fr72">72</a>]
+[<a name="fn73" href="#fr73">73</a>]
¶11/3.
</p>
<p>
-[<a name="fn73" href="#fr73">73</a>]
+[<a name="fn74" href="#fr74">74</a>]
TAMRA Conference Report, page 98: “as of the date that the
material change takes effect”. For instance, it is not
permissible to delay recognition of a material change to the
next monthiversary or anniversary.
</p>
<p>
-[<a name="fn74" href="#fr74">74</a>]
+[<a name="fn75" href="#fr75">75</a>]
If the restriction suggested in a footnote to ¶13/4 is
desired, apply it here.
I.e., in the first contract year only, reduce the new seven-pay
@@ -3325,16 +3328,16 @@ premium by a pro-rata portion of the amount paid in the
partially-completed former contract year.
</p>
<p>
-[<a name="fn75" href="#fr75">75</a>]
+[<a name="fn76" href="#fr76">76</a>]
OBRA House Report, page 1439.
</p>
<p>
-[<a name="fn76" href="#fr76">76</a>]
+[<a name="fn77" href="#fr77">77</a>]
This means that decreases occurring outside the seven-year
test period on a CVAT contract are ignored.
</p>
<p>
-[<a name="fn77" href="#fr77">77</a>]
+[<a name="fn78" href="#fr78">78</a>]
It is unduly harsh to process the decrease while ignoring
the increase, even though the necessary premium exception
may permit that.
@@ -3342,7 +3345,7 @@ In order to recognize the increase, a
material change must be declared.
</p>
<p>
-[<a name="fn78" href="#fr78">78</a>]
+[<a name="fn79" href="#fr79">79</a>]
Another interpretation is that it becomes a retrospective
MEC as of the (past) failure date; the 7702A(d)
anticipation-of-failure rule might also apply.
@@ -3350,24 +3353,24 @@ At any rate, it is
most likely too late to refund the offending premium.
</p>
<p>
-[<a name="fn79" href="#fr79">79</a>]
+[<a name="fn80" href="#fr80">80</a>]
If the misstatement is discovered prior to death, the
premium or mortality charge might be adjusted instead of the
benefits, and some would hold that this is not a material
change.
</p>
<p>
-[<a name="fn80" href="#fr80">80</a>]
+[<a name="fn81" href="#fr81">81</a>]
Some would hold that underwriting liberalizations are not
material changes.
</p>
<p>
-[<a name="fn81" href="#fr81">81</a>]
+[<a name="fn82" href="#fr82">82</a>]
Insurers could manually administer cases for which it behooves
them to recognize a material change.
</p>
<p>
-[<a name="fn82" href="#fr82">82</a>]
+[<a name="fn83" href="#fr83">83</a>]
Irregular premium, withdrawal, and SA patterns are easily
handled.
Option changes and loans can be handled with more work.