At the end of last year, there was a pleasant surprise in the COVID-19 Relief Bill, otherwise known as the Consolidated Appropriations Act, 2021 or CAA, 2021.  Buried in this massive 5,593-page bill are changes to the interest rates used in Section 7702 of the U.S. Internal Revenue Service (IRS) Tax Code. This represents the first major change to the life insurance industry since 1988!

This update to the tax code has brought about potential for new tax planning opportunities utilizing cash value life insurance.

The impact of the law is to change the interest rates used in calculating Guideline Single Premium, Guideline Level Premium, 7-Pay or Modified Endowment Premium and Net Single Premium NSP used in the Cash Value Accumulation Test (CVAT).

Guideline Single Premium: Effective 2021, use greater of rate guaranteed in the contract and 4%. (down from 6%)

Guideline Level Premium: Effective 2021, use greater of rate guaranteed in the contract and 2%. (down from 4%)

7-Pay: Effective 2021, use greater of rate guaranteed in the contract and 2%. (down from 4%)

NSP: Effective 2021, use greater of rate guaranteed in the contract and 2%. (down from 4%)

Section 7702 Minimum Prescribed Interest Rates

These rates have been static for over 30 years, however going forward, they will change based on a moving average index.

The impact of the changes will result in more efficient policies when the objective is the accumulation of cash values. It will also allow you to short pay policies when you want to get the funding out of the way without running into the issues of creating a MEC.

As of today, there has not been any changes made to existing policies. The law is effective and will be retroactive to any policy issued on or after 1/1/2021. My guess is that this will renew the interest in cash value life insurance.

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