How Section 7702 Changes Will Impact the Life Insurance Industry

In this Advanced Markets Minute, we look at the changes that were made to the definition of life insurance under Section 7702 of the Internal Revenue Code. Perhaps some of you have heard about the changes that were made. If you have, you may have even heard that this will allow more money to go into the cash value of life insurance. Or maybe you’ve heard that it is a good thing for whole life insurance. Maybe you’ve heard nothing or are just confused about the whole thing. This article should help you understand the changes and how they affect life insurance.

Without going too deep, the legislation changed the minimum interest rate that is used in the calculation of life insurance tax limits. The changes were intended to help insurance carriers that offer whole life insurance meet the requirements of section 7702. However, they also affect universal life insurance policies-including variable and indexed products.

The changes were positive for the life insurance industry at large. How much the changes affect the life insurance products offered by carriers will depend on the product modifications carriers choose to make. In general though, when solving for a needed face amount, the new rules should allow for more premium to go into a life policy without violating MEC guidelines. Alternatively, for a given planned premium, the customer will be able to solve for a lower face amount.

Here are some quick bullet points to keep in mind regarding how the changes to 7702 affect life insurance policies:

  1. The changes apply to policies issued in 2021 and beyond.
  2. United of Omaha life insurance products are compliant with the requirements because they are designed more conservatively than required under the new guidelines. This legislation caught many carriers off-guard so our company, like all others, is still assessing what our specific product modifications will be in response to the changes.
  3. Until carriers modify their products to take advantage of the new policy limits there is nothing a producer can do to take advantage of the changes.
  4. There is nothing clients can do with an existing policy to take advantage of the changes either. Any changes made to products will only apply to policies issued after a product has been modified by the carrier.

This should provide high level understanding of the 7702 changes. For now, it is best to wait for product changes as they are communicated. The timeline for that will depend on the carrier. And, keep watching your Express newsletter, as we will certainly address any product changes that occur related to this development.
 

How Section 7702 Changes Will Impact the Life Insurance Industry
 

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