[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.101-3]

[Page 361]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.101-3  Interest payments.

    (a) Applicability of section 101(c). Section 101(c) provides that if 
any amount excluded from gross income by section 101(a) (relating to 
life insurance proceeds) or section 101(b) (relating to employees' death 
benefits) is held under an agreement to pay interest thereon, the 
interest payments shall be included in gross income. This provision 
applies to payments made (either by an insurer or by or on behalf of an 
employer) of interest earned on any amount so excluded from gross income 
which is held without substantial diminution of the principal amount 
during the period when such interest payments are being made or credited 
to the beneficiaries or estate of the insured or the employee. For 
example, if a monthly payment is $100, of which $99 represents interests 
and $1 represents diminution of the principal amount, the principal 
amount shall be considered held under an agreement to pay interest 
thereon and the interest payment shall be included in the gross income 
of the recipient. Section 101(c) applies whether the election to have an 
amount held under an agreement to pay interest thereon is made by the 
insured or employee or by his beneficiaries or estate, and whether or 
not an interest rate is explicitly stated in the agreement. Section 
101(d), relating to the payment of life insurance proceeds at a date 
later than death, shall not apply to any amount to which section 101(c) 
applies. See section 101(d)(4). However, both section 101(c) and section 
101(d) may apply to payments received under a single life insurance 
contract. For provisions relating to the application of this rule to 
payments received under a permanent life insurance policy with a family 
income rider attached, see paragraph (h) of Sec. 1.101-4.
    (b) Determination of ``present value''. For the purpose of 
determining whether section 101(c) or section 101(d) applies, the 
present value (at the time of the insured's death) of any amount which 
is to be paid at a date later than death shall be determined by the use 
of the interest rate and mortality tables used by the insurer in 
determining the size of the payments to be made.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6577, 26 FR 
10127, Oct. 28, 1961]