The IRS rarely rules on issues involving life insurance and annuity contracts so recent LTR 202625002 is noteworthy. The arrangement in the ruling involves a universal life insurance contract with an annuity rider providing for installment payments that constitute an immediate annuity. The ruling concludes that the two portions should be analyzed separately under the Code so there are no adverse consequences as long as each portion meets the applicable rules.
The favorable rulings apply notwithstanding that the fixed installment annuity payments under the rider will be used to pay premiums under the life insurance contract where they will become part of the policyholder’s tax basis. The annuity payments would be taxable under the normal section 72 rules. It is also noteworthy that the annuity rider may be issued as an IRA annuity under Code section 408(b).
The product design that is the subject of the rulings suggests one way a policyholder can combine different insurance company products to meet their particular financial needs.
