REVENUE RULING 70-191
1970-1 C.B. 151

[IRS Annotation]
Accumulations held by life insurance companies under "X" type (variable annuity) contracts whereby a mortality table is used to compute amounts paid to contract holders out of funds available each year are not life insurance reserves under section 801(b) of the Code.

Rev. Rul. 70-191
Advice has been requested whether the reserves held by the taxpayer under its "X type" contracts are life insurance reserves under section 801(b) of the Internal Revenue Code of 1954.

The taxpayer was organized under State law with authority to engage in the life insurance business. Since that time it has issued, in addition to ordinary life insurance contracts, "X type" contracts described as variable annuity contracts under which the installment payments to the contract holders will vary according to the market value of the assets accumulated with respect to such contracts. Under the terms of the contract, amounts paid by the contract holder are accumulated, less expense charges, up to a maturity date, at which time the amounts so accumulated are exchanged for an annuity. This accumulation is expressed in terms of "accumulation units" with a value dependent on the assets involved.

Upon receipt by the taxpayer, the accumulation units and all income, less certain management and other specified costs, are credited to a separate fund account for the benefit of the contract holders. When the accumulation units are exchanged for an annuity, the payments made thereunder to the contract holder will vary according to the number of accumulation units to his credit. The value of each unit is determined annually on the basis of the current market value of the assets held with respect to such contracts. Payments to the contract holders are limited to the funds on hand. A mortality table is used to compute a reasonable amount to be paid to the contract holders out of the funds available each year but the contracts are not guaranteed as to mortality.

Section 801(g) of the Code defines an "annuity contract" as one that includes a contract that provides for the payment of a variable annuity computed on the basis of recognized mortality tables and the investment experience of the company issuing the contract. Further, such contract is one that provides for the allocation of all or part of the amounts received under the contract to an account that, pursuant to State law or regulations, is segregated from the general asset accounts of the company, that provides for the payments of annuities, and under which the amounts paid in, or the amount paid as annuities, reflect the investment return of the market value of the segregated account.

Reserves held with respect to variable annuity contracts may qualify as life insurance reserves within the meaning of section 801(b)(1) of the Code provided such reserves are required by law and are set aside to mature or liquidate either by payment [152] or reinsurance, future unaccrued claims arising from such contracts with reserves based on segregated accounts involving, at the time with respect to which the reserves are computed, life, health, or accident contingencies. For purposes of meeting the definition of life insurance reserves under section 801(b)(1)(A) of the Code, the investment return and the market value of the segregated asset account shall be considered an assumed rate of interest.

Thus, a variable annuity contract must satisfy the definitional requirements of section 801(g)(1) of the Code and the reserves held with respect to such contracts must meet the requirements of section 801(b) of the Code taking into account the investment return and the market value of the segregated asset account as an assumed rate of interest required by section 801(b)(1)(A) of the Code.

The contract in question does not itself provide for a variable annuity computed on the basis of a mortality table within the meaning of section 801(g) of the Code. It only provides for the segregated asset account of amounts paid in by the contract holder. Moreover, no reserve involving life contingencies is ever computed or estimated on the basis of recognized mortality or morbidity tables. The taxpayer's liability under the contract at any given time consists merely of the funds accumulated in the segregated asset account.

Accordingly, it is held that the accumulations under the "X type" contracts are not life insurance reserves within the meaning of section 801(b) of the Code.