Choose CVAT Test or GPT Test

In some cases you may be given the opportunity to choose the test to use for your policy, the GPT or the CVAT.

The cash-value accumulation test governs the cash value, not the premium or what you pay into the policy, which means that this test would be preferable if you wanted to maximum-fund your flexible-premium policy. The use of the CVAT rather than the GPT:

1. When you want to pay the full 7-pay modified endowment premium into the policy over the first 7 years

2. When you want the lowest amount of death benefit for a given premium.

3. If you plan to reduce the death benefit during the life of the policy to avoid paying taxes, which could happen with a GPT policy but is not required with a CV AT policy Section 7702 of the Internal Revenue Code is a historic and important document because it represents the first time life insur­ance has been defined for income tax purposes. In dealing with today's life insurance and these regulations, it becomes pragmatic to define life insurance as "insurance company money to be re­ceived by a beneficiary upon the death of the insured," which is referred to in the code as "amount at risk." The distinction here is that only the money that is not the property of the policy owner prior to the insured's death qualifies as life insurance.

It helps us understand and evaluate today's life insurance products if we use the term life insurance only to refer to the amount that is paid over and above that policy owner money in the event of the insured's death (insurance company money). We buy life insurance because, in the event of our death, the life in­surance company will pay our beneficiary more than what we have deposited with the company. These life insurance-company dollars are desirable, have value, and must be paid for. If a policy should ever fail to meet the Section 7702 requirements, then it would not qualify as a contract of life insurance. Therefore, the primary tax advantages of life insurance would be lost and a cur­rent income tax liability would be created.

The tax benefits of a life insurance policy are threefold:

1. The total death benefit of a life insurance contract received by the beneficiary is excluded from the beneficiary's taxable income under Internal Revenue Code Section 101. Of course, this benefit would be lost if the contract, under Internal Revenue Code Section 7702, was deemed not to be life insurance. The account value of the policy would be subject to ordinary income tax to the extent that it exceeded the policy owner's cost basis. Cost basis is what the policy owner has paid into the contract.

2. The annual inside buildup increases in cash value (account value), is tax-deferred during a policy owner's lifetime, and is tax-free if received as a result of the insured's death. If the contract was deemed not to be not a life insurance contract, these annual increases would be subject to current ordinary income tax.

3. The total accumulated income, exceeding the policy owner's cost basis in the contract compounds income tax free in a qualifying life insurance policy. It would be immediately subject to ordinary income tax the product failed to meet the tests of Internal Revenue Code Section 7702.