[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.801-4]

[Page 595-597]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.801-4  Life insurance reserves.

    (a) Life insurance reserves defined. For purposes of part I, 
subchapter L, chapter 1 of the Code, the term life insurance reserves 
(as defined in section 801(b)) means those amounts:
    (1) Which are computed or estimated on the basis of recognized 
mortality or morbidity tables and assumed rates of interest;
    (2) Which are set aside to mature or liquidate, either by payment or 
reinsurance, future unaccrued claims arising from life insurance, 
annuity, and noncancellable health and accident insurance contracts 
(including life insurance or annuity contracts combined with 
noncancellable health and accident insurance) involving, at the time 
with respect to which the reserve is computed, life, health, or accident 
contingencies; and
    (3) Which, except as otherwise provided by section 801(b)(2) and 
paragraphs (b) and (c) of this section, are required by law. For the 
meaning of the term ``reserves required by law'', see paragraph (b) of 
Sec. 1.801-5.

For purposes of determining life insurance reserves, only those amounts 
shall be taken into account which must be reserved either by express 
statutory provisions or by rules and regulations of the insurance 
department of a State, Territory, or the District of Columbia when 
promulgated in the exercise of a power conferred by statute. Moreover, 
such amounts must actually be held by the company during the taxable 
year for which the reserve is claimed. However, reserves held by the 
company with respect to the net value of risks reinsured in other 
solvent companies

[[Page 596]]

(whether or not authorized) shall be deducted from the company's life 
insurance reserves. For example, if an ordinary life policy with a 
reserve of $100 is reinsured in another solvent company on a yearly 
renewable term basis, and the reserve on such yearly renewable term 
policy is $10, the reinsured company shall include $90 ($100 minus $10) 
in determining its life insurance reserves. Generally, life insurance 
reserves, as in the case of level premium life insurance, are held to 
supplement the future premium receipts when the latter, alone, are 
insufficient to cover the increased risk in the later years. For 
examples of reserves which qualify as life insurance reserves, see 
paragraph (d) of this section. For examples of reserves which do not 
qualify as life insurance reserves, see paragraph (e) of this section.
    (b) Certain reserves which need not be required by law. Section 
801(b)(2) sets forth certain reserves which, though not required by law, 
may still qualify as life insurance reserves, provided, however, that 
they first satisfy the requirements of section 801(b)(1) (A) and (B) and 
paragraph (a) (1) and (2) of this section. Thus, reserves need not be 
required by law:
    (1) In the case of policies covering life, health, and accident 
insurance combined in one policy issued on the weekly premium payment 
plan, continuing for life and not subject to cancellation, and
    (2) For taxable years beginning before January 1, 1970, in the case 
of policies issued by an organization which met the requirements of 
section 501(c)(9) (as it existed prior to amendment by the Tax Reform 
Act of 1969) other than the requirement of subparagraph (B) thereof.
    (c) Assessment companies. Section 801(b)(3) provides that in the 
case of an assessment life insurance company or association, the term 
life insurance reserves includes:
    (1) Sums actually deposited by such company or association with 
officers of a State or Territory pursuant to law as guaranty or reserve 
funds, and
    (2) Any funds maintained, under the charter or articles of 
incorporation or association of such company or association (or bylaws 
approved by the State insurance commissioner) of such company or 
association, exclusively for the payment of claims arising under 
certificates of membership or policies issued upon the assessment plan 
and not subject to any other use.

For purposes of part I, subchapter L, chapter 1 of the Code, the 
reserves described in this paragraph shall be included as life insurance 
reserves even though such reserves do not meet the requirements of 
section 801(b) and paragraph (a) of this section. However, for such 
reserves to be included as life insurance reserves, they must be 
deposited or maintained to liquidate future unaccrued claims arising 
from life insurance, annuity, or noncancellable health and accident 
insurance contracts (including life insurance or annuity contracts 
combined with noncancellable health and accident insurance) involving, 
at the time with respect to which the reserve is deposited or 
maintained, life, health, or accident contingencies. The rate of 
interest assumed in calculating the reserves described in this paragraph 
shall be 3 percent, regardless of the rate of interest (if any) 
specified in the contract in respect of such reserves.
    (d) Reserves which qualify as life insurance reserves. The following 
reserves, provided they meet the requirements of section 801(b) and 
paragraph (a) of this section, are illustrative of reserves which shall 
be included as life insurance reserves:
    (1) Reserves held under life insurance contracts.
    (2) Reserves held under annuity contracts (including reserves held 
under variable annuity contracts as described in section 801(g)(1)).
    (3) Reserves held under noncancellable health and accident insurance 
contracts (as defined in paragraph (c) of Sec. 1.801-3) and reserves 
held under guaranteed renewable health and accident insurance contracts 
(as defined in paragraph (d) of Sec. 1.801-3).
    (4) Reserves held either separately or combined under contracts 
described in subparagraphs (1), (2), or (3) of this paragraph.
    (5) Reserves held under deposit administration contracts. Generally, 
the reserves held by a life insurance company on both the active and 
retired

[[Page 597]]

lives under deposit administration contracts will meet the requirements 
of section 801(b) and paragraph (a) of this section.

However, reserves held by the company with respect to the net value of 
risks reinsured in other solvent companies (whether or not authorized) 
shall be deducted from the company's life insurance reserves. See 
paragraph (a) of this section.
    (e) Reserves and liabilities which do not qualify as life insurance 
reserves. The following are illustrative of reserves and liabilities 
which do not meet the requirements of section 801(b) and paragraph (a) 
of this section and, accordingly, shall not be included as life 
insurance reserves:
    (1) Liability for supplementary contracts not involving at the time 
with respect to which the liability is computed, life, health, or 
accident contingencies.
    (2) In the case of cancellable health and accident policies and 
similar cancellable contracts, the unearned premiums and unpaid losses 
(whether or not ascertained).
    (3) The unearned premiums, and unpaid losses (whether or not 
ascertained), on noncancellable life, health, or accident policies (and 
guaranteed renewable life, health, and accident policies) not included 
in life insurance reserves. (However, such amounts shall be taken into 
account under section 801(a)(2) for purposes of determining whether an 
insurance company is a life insurance company.)
    (4) The deficiency reserve (as defined in section 801(b)(4)) for 
each individual contract, that is, that portion of the reserve for such 
contract equal to the amount (if any) by which:
    (i) The present value of the future net premiums required for such 
contract, exceeds
    (ii) The present value of the future actual premiums and 
consideration charged for such contract.
    (5) Reserves required to be maintained to provide for the ordinary 
operating expenses of a business which must be currently paid by every 
company from its income if its business is to continue, such as taxes, 
salaries, and unpaid brokerage.
    (6) Liability for premiums received in advance.
    (7) Liability for premium deposit funds.
    (8) Liability for annual and deferred dividends declared or 
apportioned.
    (9) Liability for dividends left on deposit at interest.
    (10) Liability for accrued but unsettled policy claims whether known 
or unreported.
    (11) A mandatory securities valuation reserve.
    (f) Adjustments to life insurance reserves. In the event it is 
determined on the basis of the facts of a particular case that premiums 
deferred and uncollected and premiums due and unpaid are not properly 
accruable for the taxable year under section 809 and, accordingly, are 
not properly includible under assets (as defined in section 805(b)(4)) 
for the taxable year, appropriate reduction shall be made in the life 
insurance reserves. This reduction shall be made when the insurance 
company has calculated life insurance reserves on the assumption that 
the premiums on all policies are paid annually or that all premiums due 
on or prior to the date of the annual statement have been paid.

[T.D. 6513, 25 FR 12656, Dec. 10, 1960, as amended by T.D. 7172, 37 FR 
5619, Mar. 17, 1972]