818

MR. DENNIS VAN MIEGHEN: Regarding 818(c), some companies are

now starting to get in the audit cycle where their universal life

products are being examined by the Internal Revenue Service (IRS).

It’s not uncommon to have a 3-5 year delay on an audit, so there’s not

a lot of experience to date. But we’ve had four or five companies that

started issuing universal life in late 1979 and 1980 that have been

subject to examination. It looks like there are going to be two attacks,

and they are not consistent presently. One is that universal life

represents term insurance and an annuity rider, and therefore, it’s not

Life insurance. It doesn’t qualify for 818(c) because it’s not whole life;

it’s term insurance with an annuity. This is a breakout approach, if

you will. Another attack is that, at the agent level, the IRS is

allowing 818(c), but it is disallowing the differential between the cash

value reserve and that portion of the reserve that is set up in Exhibit

8A in the U.S. annual statement as a GRVM reserve. That varies by

company as to whether the company tried to calculate a separate CRVM

reserve and then show an excess cash value in Exhibit 8G. But in that

approach, the IRS is essentially allowing 818(c) but disallowing the

differential between CRVM and cash value saying it’s essentially a

surplus reserve and not deductible. When we get through with all

this, I think the IRS’s attack will focus on whether a product with a

cash value reserve as the total reserve before segregation has a

recognized preliminary term or CRVM reserving method. In any event,

I think you will see an attack trying to allow $0 or $5 at most, and it

will probably end up in court because the dollars involved are very

large.

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