Cash Value Accumulation Test (CVAT) & Guideline Premium Test (GPT) Changes

This week’s tip addresses the impact on life insurance product filings of recent federal legislation on death benefit factors used to ensure a product qualifies as life insurance under Internal Revenue Code Section 7702.

At the end of December 2020, Congress enacted the Consolidated Appropriations Act, 2021, which includes revisions to Section 7702 to tie interest rates to either a floating rate prescribed by the NAIC's Standard Valuation Law or a floating rate based on the average applicable Federal mid-term rates over a 60-month period. The Cash Value Accumulation Test (CVAT) and Guideline Premium Test (GPT) interest rates were previously set by statute at four and six percent when the requirements were put in place in 1984. The changes to Section 7702 provide a transitional rule that sets the CVAT interest rate at two percent for 2021 issues. After the transitional period, the floating rate methodology applies.

The Uniform Standards for universal life products (IIPRC-L-09-I) and variable universal life products (IIPRC-L-06-I) require these products to include a table of death benefit factors used to determine compliance at issue with the CVAT or GPT. As a result of the interest rate change in Section 7702, filing companies may wish to revise the death benefit factors for UL, VUL and other products or benefits. Here are key pointers on changing death benefit factors or other CVAT/GPT details:

  • Other than the requirement that the table of death benefit factors be provided, the Compact does not review or approve information regarding a product’s qualification as life insurance under Section 7702.
  • The death benefit factors are permitted to be bracketed as variable values. IIPRC-L-09-I, Section 1C(5) states:
  • “The company may also identify product specifications that may be changed without prior notice or approval, as long as the Statement of Variability presents reasonable and realistic ranges for the item. These items include charges for illustrative reports, minimum specified amounts following a decrease, minimum increase and decrease amounts, number of partial withdrawals, conversion periods, conversion credits, minimum partial withdrawal and minimum loan.”
  • Sample specification pages submitted as part of the policy form are to be completed with hypothetical data (including CVAT and GPT factors) that is realistic and consistent with both the other contents of the policy and any required actuarial memorandum in support of nonforfeiture values.
  • If bracketed, CVAT/GPT factors may be explained on the SOV by either (1) including a range for the factors, or (2) a statement describing how the factors may vary, such as by gender, issue age, risk class or due to changes in federal requirements.
  • If bracketed in a previously approved filing, CVAT/GPT factors may be changed without a new filing.
  • If not bracketed in a previously approved filing, a new filing using the Supporting Documentation Update filing type may be used to make non-variable items variable in accordance with FIN 2017-1, Section II.C.2.
  • If a previously approved actuarial memorandum included CVAT/GPT details that have changed, companies are not required to submit a revised actuarial memorandum.

If you have any questions regarding this Weekly Tip or submitting a filing, please reach out to the Insurance Compact Office.

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