Net premiums

Net premiums -
(1) In general. An insurance company must use the accrual method of accounting (as prescribed by section 811(a)(1)) to determine the net premiums with respect to each category of specified insurance contracts. With respect to any category of contracts, net premiums means -
(i) The gross amount of premiums and other consideration (see paragraph (b) of this section); reduced by
(ii) The sum of -
(A) The return premiums (see paragraph (e) of this section); and
(B) The net negative consideration for a reinsurance agreement (other than an agreement described in paragraph (h)(2) of this section). See paragraphs (f) and (g) of this section for rules relating to the determination of net negative consideration.
(2) Separate determination of net premiums for certain reinsurance agreements. Net premiums with respect to reinsurance agreements for which an election under paragraph (h)(3) of this section has been made (certain reinsurance agreements with parties not subject to United States taxation) are treated separately and are subject to the rules of paragraph (h) of this section.
(b) Gross amount of premiums and other consideration -
(1) General rule. The term “gross amount of premiums and other consideration” means the sum of -
(i) All premiums and other consideration (other than amounts on reinsurance agreements); and
(ii) The net positive consideration for any reinsurance agreement (other than an agreement for which an election under paragraph (h)(3) of this section has been made).
(2) Items included. The gross amount of premiums and other consideration includes -
(i) Advance premiums;
(ii) Amounts in a premium deposit fund or similar account, to the extent provided in paragraph (b)(3) of this section;
(iii) Fees;
(iv) Assessments;
(v) Amounts that the insurance company charges itself representing premiums with respect to benefits for its employees (including full-time life insurance salesmen treated as employees under section 7701(a)(20)); and
(vi) The value of a new contract issued in an exchange described in paragraph (c)(2) or (c)(3) of this section.
(3) Treatment of premium deposits -
(i) In general. An amount in a premium deposit fund or similar account is taken into account in determining the gross amount of premiums and other consideration at the earlier of the time that the amount is applied to, or irrevocably committed to, the payment of a premium on a specified insurance contract. If an amount is irrevocably committed to the payment of a premium on a specified insurance contract, then neither that amount nor any earnings allocable to that amount are included in the gross amount of premiums and other consideration when applied to the payment of a premium on the same contract.
(ii) Amounts irrevocably committed to the payment of premiums. Except as provided in paragraph (b)(3)(iii) of this section, an amount in a premium deposit fund or similar account is irrevocably committed to the payment of premiums on a contract only if neither the amount nor any earnings allocable to that amount may be -
(A) Returned to the policyholder or any other person (other than on surrender of the contract); or
(B) Used by the policyholder to fund another contract.
(iii) Retired lives reserves. Premiums received by an insurance company under a retired lives reserve arrangement are treated as irrevocably committed to the payment of premiums on a specified insurance contract.
(4) Deferred and uncollected premiums. The gross amount of premiums and other consideration does not include deferred and uncollected premiums.
(c) Policy exchanges -
(1) General rule. Except as otherwise provided in this paragraph (c), an exchange of insurance contracts (including a change in the terms of a specified insurance contract) does not result in any amount being included in the gross amount of premiums and other consideration.
(2) External exchanges. If a contract is exchanged for a specified insurance contract issued by another insurance company, the company that issues the new contract must include the value of the new contract in the gross amount of premiums and other consideration.
(3) Internal exchanges resulting in fundamentally different contracts -
(i) In general. If a contract is exchanged for a specified insurance contract issued by the same insurance company that issued the original contract, the company must include the value of the new contract in the gross amount of premiums and other consideration if the new contract -
(A) Relates to a different category of specified insurance contract than the original contract;
(B) Does not cover the same insured as the original contract; or
(C) Changes the interest, mortality, morbidity, or expense guarantees with respect to the nonforfeiture benefits provided in the original contract.
(ii) Certain modifications treated as not changing the mortality, morbidity, interest, or expense guarantees. For purposes of paragraph (c)(3)(i)(C) of this section, the following items are not treated as changing the interest, mortality, morbidity, or expense guarantees with respect to the nonforfeiture benefits provided in the contract -
(A) A change in a temporary guarantee with respect to the amounts to be credited as interest to the policyholder's account, or charged as mortality, morbidity, or expense charges, if the new guarantee applies for a period of ten years or less;
(B) The determination of benefits on annuitization using rates which are more favorable to the policyholder than the permanently guaranteed rates; and
(C) Other items as specified by the Commissioner in subsequent guidance published in the Internal Revenue Bulletin.
(iii) Exception for contracts restructured by a court supervised rehabilitation or similar proceeding. No amount is included in the gross amount of premiums and other consideration with respect to any change made to the interest, mortality, morbidity, or expense guarantees with respect to the nonforfeiture benefits of contracts of an insurance company that is the subject of a rehabilitation, conservatorship, insolvency, or similar state proceeding. This treatment applies only if the change -
(A) Occurs as part of the rehabilitation, conservatorship, insolvency, or similar state proceeding; and
(B) Is approved by the state court, the state insurance department, or other state official with authority to act in the rehabilitation, conservatorship, insolvency, or similar state proceeding.
(4) Value of the contract -
(i) In general. For purposes of paragraph (c)(2) or (c)(3) of this section, the value of the new contract is established through the most recent sale by the company of a comparable contract. If the value of the new contract is not readily ascertainable, the value may be approximated by using the interpolated terminal reserve of the original contract as of the date of the exchange.
(ii) Special rule for group term life insurance contracts. In the case of any exchange involving a group term life insurance contract without cash value, the value of the new contract is deemed to be zero.
(iii) Special rule for certain policy enhancement and update programs -
(A) In general. If the interest, mortality, morbidity, or expense guarantees with respect to the nonforfeiture benefits of a specified insurance contract are changed pursuant to a policy enhancement or update program, the value of the contract included in the gross amount of premiums and other consideration equals 30 percent of the value determined under paragraph (c)(4) of this section.
(B) Policy enhancement or update program defined. For purposes of paragraph (c)(4)(iii)(A) of this section, a policy enhancement or update program means any offer or commitment by the insurance company to all of the policyholders holding a particular policy form to change the interest, mortality, morbidity, or expense guarantees used to determine the contract's nonforfeiture benefits.
(5) Example. The principles of this paragraph (c) are illustrated by the following example.
(ii) A's purchase of the term insurance rider is not considered to result in a fundamentally different contract under paragraph (c)(3) of this section because the addition of the rider did not change the interest, mortality, morbidity, or expense guarantees with respect to the nonforfeiture values of A's original life insurance policy. Therefore, L1 includes only the $250 received from A in the gross amount of premiums and other consideration.

Source

26 CFR § 1.848-2


Scoping language

None
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