Rev. Rul. 60-61

The Internal Revenue Service has received numerous inquiries concerning whether a life insurance company which computes its life insurance reserves on a preliminary term basis may elect under section 818(c) of the Internal Revenue Code of 1954, as added by the Life Insurance Company Income Tax Act of 1959, Public Law 86-69, C.B. 1959-2, 654, to revalue its life reserves under the `approximate' method and its noncancellable accident and health insurance reserves under the `exact' method.

Section 818(c) of the Code provides that where a company actually computes its life insurance reserves on one of the recognized preliminary term bases, it may elect to convert them to a net level premium basis in the computation of its life insurance reserves for federal tax purposes. The reserves may be converted from a preliminary term basis to a net level premium basis by one of two methods. Section 818(c)(1) provides the exact revaluation method. Under this method, the life insurance company must compute the reserves for all such contracts on a net level premium basis, using the same mortality assumptions and interest rates for both the preliminary term basis and the net level premium basis. Section 818(c)(2) provides the approximate revaluation method. Under this method, the life insurance reserves are converted to a net level premium basis by the use of a formula set forth under section 818(c)(2). This formula is expressed, in part, in terms of `insurance in force.'

It has been brought to the attention of the Service that the formula provided under the approximate revaluation method cannot be applied in the case of noncancellable accident and health insurance contracts for the reason that there is no concept of `insurance in force' under such contracts. Thus, a question has been raised as to whether a company with any noncancellable accident and health reserves computed on a preliminary term basis is precluded from the use of the approximate method.

It is the intent of section 818(c) of the Code to provide life insurance companies with alternative methods for revaluing their life insurance reserves computed on a preliminary term basis. The exact method, if elected, can be applied to all contracts for which life insurance reserves are computed on a preliminary term basis. The approximate method, if elected, is of necessity applicable only to those contracts which fall within the scope of the formula. The manifest purpose of Congress, namely, to provide insurance companies with alternative elections, would be thwarted if a company, with both life and noncancellable accident and health reserves computed on a preliminary term basis, was precluded from electing the approximate method because of the existence of such noncancellable accident and health reserves.

Accordingly, a life insurance company may elect, under section 818(c) of the Code, the approximate revaluation method for all its life insurance reserves, other than noncancellable accident and health reserves, and use the exact revaluation method for all its noncancellable accident and health reserves since such reserves are incapable of meeting the formula contained in the approximate method.

¹ Based on Technical Information Release 192, dated December 10, 1959.