Rev. Rul. 68-185

An insurance company is engaged solely in the business of issuing life insurance through both direct writings and reinsurance insuring the lives of debtors of various credit institutions. Such institutions are the beneficiaries under the contracts. All of the contracts are of short duration. The company is required by law to maintain life insurance reserves. It computes its life insurance reserves by determining the average age of the borrowers and the average duration of the policies it issues and applies those averages to a recognized mortality table. The reserves so computed are maintained at assumed rates of interest.

The above-described contracts are known as `credit life insurance contracts.' Since the payment of the insurance money is contingent upon the loss of life of the debtor, the contract is recognized as a life insurance contract. A company engaged principally in the business of writing or reinsuring credit life contracts may qualify as a life insurance company, as defined in section 801(a) of the Internal Revenue Code of 1954, provided its life insurance reserves (as defined in section 801(b) of the Code) comprise more than 50 percent of the total reserves.

Section 801(b) of the Code defines `life insurance reserves' as amounts which are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, and which are set aside to mature or liquidate future unaccrued claims arising from life insurance contracts involving, at the time with respect to which the reserve is computed, life contingencies. With certain exceptions not pertinent here, such reserves must be required by law.

Held, those reserves that are required by law to be maintained by the insurance company and that are determined by application of an average age and average duration against a recognized mortality and morbidity table qualify as life insurance reserves under section 801(b) of the Code provided such averages are in accord with the actual ages of the insured members of the group and the actual durations of the policies issued.