Life Insurance Reserve Increase Deduction

§ 807. Rules for certain reserves(a) Decrease treated as gross incomeIf for any taxable year—(1) the opening balance for the items described in subsection (c), exceeds (2)(A) the closing balance for such items, reduced by (B) the amount of the policyholders’ share of tax-exempt interest and the amount of the policyholder’s share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies, such excess shall be included in gross income under section 803(a)(2). (b) Increase treated as deductionIf for any taxable year—(1)(A) the closing balance for the items described in subsection (c), reduced by (B) the amount of the policyholders’ share of tax-exempt interest and the amount of the policyholder’s share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies, exceeds (2) the opening balance for such items, such excess shall be taken into account as a deduction under section 805(a)(2). (c) Items taken into accountThe items referred to in subsections (a) and (b) are as follows:(1) The life insurance reserves (as defined in section 816(b)). (2) The unearned premiums and unpaid losses included in total reserves under section 816(c)(2). (3) The amounts (discounted at the appropriate rate of interest) necessary to satisfy the obligations under insurance and annuity contracts, but only if such obligations do not involve (at the time with respect to which the computation is made under this paragraph) life, accident, or health contingencies. (4) Dividend accumulations, and other amounts, held at interest in connection with insurance and annuity contracts. (5) Premiums received in advance, and liabilities for premium deposit funds. (6) Reasonable special contingency reserves under contracts of group term life insurance or group accident and health insurance which are established and maintained for the provision of insurance on retired lives, for premium stabilization, or for a combination thereof. For purposes of paragraph (3), the appropriate rate of interest is the highest rate or rates permitted to be used to discount the obligations by the National Association of Insurance Commissioners as of the date the reserve is determined. In no case shall the amount determined under paragraph (3) for any contract be less than the net surrender value of such contract. For purposes of paragraph (2) and section 805(a)(1), the amount of the unpaid losses (other than losses on life insurance contracts) shall be the amount of the discounted unpaid losses as defined in section 846.