IRC 807 Life Insurance Reserves: CRVM and the 92.81% Factor

Under IRC 807, life insurance reserves for federal income tax are calculated contract by contract using a three-step formula: start with the reserve produced by the NAIC-prescribed valuation method for that contract type, multiply by 92.81 percent, then take the greater of that result or the contract’s net surrender value, capped at the statutory reserve required under state law. The year-over-year change in the sum of these contract-level reserves (together with the other items listed in Section 807(c)) either increases or decreases the company’s taxable income.

Reserves That Qualify Under Section 807(c)

Only the specific items listed in IRC 807(c) feed the reserve calculation. Everything else on an insurer’s balance sheet, including asset adequacy reserves and other supplemental reserves state regulators may require, stays out.¹

Before any amount reaches 807(c), it has to clear the “life insurance reserve” definition in IRC 816(b): computed using recognized mortality or morbidity tables and assumed interest rates, set aside to cover future unaccrued claims involving life, accident, or health contingencies, and required by state law (with narrow exceptions for certain assessment companies).²

Section 807(c) then enumerates the categories:

Life insurance reserves as defined in Section 816(b), covering future death benefits, annuity payouts, and similar obligations.
Unearned premiums and unpaid losses.
Amounts needed to satisfy insurance and annuity obligations that don’t involve life, accident, or health contingencies at the time of computation, discounted at the appropriate interest rate.
Dividend accumulations and other amounts held at interest in connection with insurance and annuity contracts.
Advance premiums and premium deposit fund liabilities.
Reasonable special contingency reserves under group term life or group accident and health contracts for retired-lives coverage or premium stabilization.

The Tax Reserve Method

Section 807(d)(3) defines the “tax reserve method” by contract type:

Life insurance contracts use the Commissioners’ Reserve Valuation Method (CRVM) as prescribed by the NAIC.
Annuity contracts use the Commissioners’ Annuities Reserve Valuation Method (CARVM).
Noncancellable accident and health contracts use whatever reserve method the NAIC prescribes for that contract type.
Other contracts use the applicable NAIC-prescribed method, or if none exists, a method consistent with CRVM, CARVM, or the other applicable method.

Under the Tax Cuts and Jobs Act rewrite, the method is determined as of the date the reserve is calculated, not the date the contract was issued.¹ When the NAIC updates CRVM, CARVM, or any applicable method, the update flows through to the tax reserve for existing contracts rather than locking in the standard that applied at issue.³

How the CRVM Works

The CRVM computes a reserve as the present value of the insurer’s future guaranteed benefits minus the present value of future modified net premiums.⁴ The “modified” net premium adjusts the level premium to account for heavier acquisition expenses in the first policy year, producing a reserve that starts low and builds as premiums come in and the remaining obligation shortens. Mortality and interest assumptions come from NAIC-adopted tables; for recently issued life policies, the 2017 Commissioners Standard Ordinary (CSO) tables have largely replaced the 2001 CSO tables as the standard mortality basis.

The 92.81 Percent Factor, the Floor, and the Cap

IRC 807(d)(1) applies three constraints to the method-based reserve for each contract.

First, multiply the tax reserve method amount by 92.81 percent. This flat factor replaces the pre-TCJA system of prescribed interest rates and mortality tables, reducing the deductible reserve by roughly 7.2 percent compared to the NAIC method standing alone.

Second, compare that figure to the contract’s net surrender value. The tax reserve is the greater of the two.¹ For cash-value life policies where the surrender value has grown large relative to the computed reserve, this floor controls.

Third, cap the result at the statutory reserve the company is required to hold under state law. The 92.81 percent factor usually keeps the tax reserve well below that ceiling, but the cap is there as a safeguard against the federal calculation accidentally producing a larger figure than the state-mandated liability.

For a standard life insurance contract, the sequence is: CRVM reserve, times 0.9281, compared against net surrender value with the larger retained, then capped at the statutory reserve. That final figure is the tax reserve for the contract.

Variable Life and Annuity Contracts

Section 807(d)(1)(B) splits the reserve for variable life and variable annuity contracts because part of the reserve sits in a segregated account whose value moves with the market. First, take the greater of the contract’s net surrender value or the portion of the reserve separately accounted for under IRC 817. Then apply 92.81 percent only to any excess of the full tax reserve method amount over that first piece. Add the two components. The statutory cap still applies.¹

IRC 817 requires the company to separately account for all income, deductions, assets, reserves, and liabilities attributable to variable contracts, and to strip asset appreciation and depreciation out of the reserve adjustment so investment gains and losses flow through the correct channels. Guarantee obligations that exceed what the contract would require without the guarantee are treated as general account liabilities, not segregated account reserves.⁵

How the Reserve Change Reaches Taxable Income

IRC 807(a) and (b) convert the year-over-year movement in the 807(c) items into either gross income or a deduction. Compare the opening balance to the closing balance (the closing balance reduced by the policyholders’ share of tax-exempt interest and certain policy cash value increases). A closing balance larger than the opening balance produces a deduction. An opening balance larger than the closing balance produces gross income.¹

The company reports the figures on Schedule F of Form 1120-L, walking through each 807(c) category to compute opening and closing balances and arrive at the net change. A net decrease flows to the income section of Form 1120-L (line 2); a net increase flows to the deductions section (line 10).⁶ Separate lines capture adjustments for changes in reserve computation methods under Section 807(f).⁷

The 70/30 Company and Policyholder Split

IRC 812 splits a life insurer’s income and deductions between a company’s share and a policyholder’s share. Since 2018, the company’s share has been fixed at 70 percent and the policyholder’s share at 30 percent.⁸ The policyholder’s share reduces the closing balance of reserves under Section 807(b) when the net change is computed, which limits the deduction.

Mean Reserve Rule

IRC 816(b)(4) specifies that the amount of any reserve for a taxable year is the mean of the reserve at the beginning and end of the year.² This averaging smooths out the effect of blocks of business written or terminated near year-end.

Changes in Reserve Computation Method

When the basis for computing any 807(c) item changes from one year to the next, Section 807(f) treats the difference as a change in accounting method. The company computes the year-end reserve under both the old and new methods, and the difference attributable to contracts issued before the current tax year is taken into account under IRC 481 as an adjustment requiring IRS consent.¹

Because the tax reserve method now references the NAIC standard in effect on the date the reserve is determined, an NAIC update to CRVM or CARVM automatically triggers a reserve recomputation for existing contracts, and the resulting difference runs through the 807(f) accounting method change mechanism. If a company ceases to qualify as a life insurance company, any remaining balance of the 807(f) adjustment accelerates into the final year of life-insurance-company status.

1
Office of the Law Revision Counsel. 26 U.S. Code 807 – Rules for Certain Reserves
2
Office of the Law Revision Counsel. 26 U.S. Code 816 – Life Insurance Company Defined
3
Federal Register. Computation and Reporting of Reserves for Life Insurance Companies
4
National Association of Insurance Commissioners. Standard Valuation Law – Model Law 820
5
Office of the Law Revision Counsel. 26 U.S. Code 817 – Treatment of Variable Contracts
6
Internal Revenue Service. Instructions for Form 1120-L
7
Internal Revenue Service. Form 1120-L – U.S. Life Insurance Company Income Tax Return
8
Office of the Law Revision Counsel. 26 U.S. Code 812 – Definition of Companys Share and Policyholders Share