Cash Value Accumulation Test (CVAT) and Guideline Premium Test (GPT)

The basic tests of sufficiency of net amount at risk are cash value accumulation test (CVAT) and Guideline premium test (GPT).

The definition in the law is expressed in terms of net amount at risk: "only the excess of the amount paid by reason of the insured's death over the contract's net surrender value should be deemed to be. . .life insurance. . . ." Section 7702 of the Internal Revenue Code lays out the requirements that "net amount at risk" exist and be in sufficient amount for the contract containing such net amount at risk for it to be considered "life insurance." Section 7702 also lays out two alternative tests that a policy must pass for it to be considered "life insurance." They are the cash-value accumulation test and the guideline premium/corridor test.

The basic tests of sufficiency of net amount at risk are:

1. Cash-value accumulation test (CVAT). The net cash surrender value (the policy owner's current equity in the contract) cannot exceed the discounted value of the net single premium that could compound to the face amount of the policy at age 95. The discount factor is 4 percent, or the minimum rate guaranteed in the contract.

2. Guideline premium test (GPT). The guideline premium is based upon the guideline single premium or the sum of the guideline level premiums to date. The guideline-single-premium portion of the test limits the amount a policy owner may invest in a policy. You cannot pay more into a life insurance policy than the net present value of the future benefits to be paid at age 95 (the full face amount of the policy), discounted at 6 percent, assuming the contract's stated mortality and expenses. The guideline level premium refers to the level annual amount that will fund the future benefits (the face amount at age 95) payable to age 95, assuming the contract's stated mortality and expense charges and 4 percent interest. The cash-value corridor requirement refers to the percentage relationship of the policy's death benefit to the policy owner's equity.