Working Through Uncertainty

(Co-authored with Cindy D. Barnard, Housseine Essaheb, Sheryl B. Flum, James P. Van Etten) 

Sheryl: As we write this article, both the House of Representatives and the U.S. Senate have passed versions of the Tax Cuts and Jobs Act. Both proposals include significant changes to how life insurance companies are taxed. The Senate version includes a change to the computation of life insurance reserves for purposes of determining taxable income that applies a haircut to statutory reserves. An early version of the House's bill included a similar approach. 

We are also in the middle of the transition period for implementing principle-based reserves (PBR). Life insurance companies have been working on creating systems to support PBR, determine the ideal time to adopt PBR, and developing new life insurance products that will have reserves determined using PBR, even  though the exact method for computing reserves for tax purposes remain unclear. The life insurance industry has been working with the IRS through an industry issue resolution process (IIR) to determine the tax consequences under the existing Internal Revenue Code (Code). But Congress is on the cusp of passing a new Code that will likely affect the tax issues surrounding principle based reserves.  

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Peter WinslowL. Wright