CVAT or Guideline?

When should I use CVAT vs. Guideline?  This is a question we frequently get when helping an agent set up a new business illustration.  Below explains what CVAT and Guideline mean and some scenarios of when to use each one.

 

Cash Value Accumulation Test (CVAT) and Guideline Premium (Defra) are types of IRS/DEFRA testing that have components that must be met so a policy qualifies as life insurance under IRS section 7702.

 

CVAT

This type of testing has one component that must be met.

1. A contract meets the cash value accumulation test of this subsection if, by the terms of the contract, the cash value of such contract may not at any time exceed the net single premium which would have to be paid at such time to fund future benefits under the contract.  If the cash value does exceed the net single premium the Illustration System will raise the death benefit to insure the life policy passes the cash value accumulation test.

Guideline

This type of testing has two components that both must be met.

1. The sum of the total premiums paid under the life contract cannot exceed the greater of the Guideline Single Premium or the accumulated Guideline Level Premium.  Premium payments will be limited and the policy value "force outs" will be taken on the Illustration System to guarantee that this requirement is met.
2. If the specified amount of the policy at any time is less than the applicable cash value multiplied by the corridor rate the policy will enter the "cash value corridor" and the death benefit for the period will be increased.

CVAT works better for clients:

• Choosing a level death benefit or funding at the 7-pay limit for 7 years since there are no limits on premium payments
• Looking to highly fund their policies (in excess of Guideline premium limits), over a short period of time
• Requiring future reductions in their policy face amount
• Purchasing a guaranteed life insurance product which will be funded past age 100

Guideline works better for clients:

• Maximizing their late duration cash and death benefit while funding at the Guideline Single Premium limit, assuming the death benefit will go into the corridor in the future
• Choosing an increasing death benefit (Option B) and wish to pay the maximum non-MEC premium for more than 7 years before switching to a level death benefit option (Option A)

Have a Great Day,

Illustration Development Team
1-800-572-2467 x8162
illustrationhelp@kclife.com