The 7 pay test places a limit on the number of premiums that can be paid into the policy over a period of seven years. Conduct the seven pay test on the policy using the premium shown for that amount of insurance.
Cash value policies are now subject to the technical and miscellaneous revenue act of 1988 tamra seven pay test.
Insurance 7 pay test. Insurance that will pay for damage to your car by someone who doesn t have insurance. It will also need to be applied in later years if any material change in the policy occurs discussed below how do you know if your life insurance policy is a mec. A modified endowment policy is a life insurance policy that has failed a 7 pay test the result is that all loans and cash withdrawals are taxed using the last in first out or lifo accounting.
Section 7702 is silent on the treatment of charges for qabs for purposes of. Let s say sally has a life insurance contract with an annual 7 pay premium of 15 000. However its should also be noted that any reduction in benefits during the 7 pay test period will cause a recalculation of the the 7 pay premium as if the reduction had been established at the outset.
The 7 pay test must be applied for any cash value policy when it is issued and then continuously during the first seven years. This test limits the tax benefits of withdrawals on these policies. Insurance that will cover injuries to yourself in the event of an accident.
An example will ensure clarity. Insurance that will pay for injury to another driver and or damage to their car if you are in an accident. The seven pay test compares the premium paid into the policy in the first seven years with the amount paid into a seven year paid up whole life policy of the same death benefit.
Under that provision charges for qabs are accounted for under the expense charge rule of 7702 c 3 b ii. If the premiums during this period exceed this limit then the policy automatically becomes a modified endowment contract. 7 pay test are made by applying the cash value accumulation test rules of 7702 b 2.
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