To amend the Internal Revenue Code of 1986 to provide for the tax treatment of accelerated death benefits under life insurance contracts.

SECTION 1. TAX TREATMENT OF ACCELERATED DEATH BENEFITS UNDER LIFE 
              INSURANCE CONTRACTS.

    (a) General Rule.--Section 101 of the Internal Revenue Code of 1986 
(relating to certain death benefits) is amended by adding at the end 
the following new subsection:
    ``(g) Treatment of Certain Accelerated Death Benefits.--
            ``(1) In general.--For purposes of this section, any amount 
        received under a life insurance contract on the life of an 
        insured who is a terminally ill individual shall be treated as 
        an amount paid by reason of the death of such insured.
            ``(2) Necessary conditions.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any amount received unless--
                            ``(i) the total amount received is not less 
                        than the present value (determined under 
                        subparagraph (B)) of the reduction in the death 
                        benefit otherwise payable in the event of the 
                        death of the insured, and
                            ``(ii) the percentage reduction in the cash 
                        surrender value of the contract by reason of 
                        the distribution does not exceed the percentage 
                        reduction in the death benefit payable under 
                        the contract by reason of such distribution.
                    ``(B) Present value.--The present value of the 
                reduction in the death benefit shall be determined by--
                            ``(i) using a discount rate which is based 
                        on an interest rate which does not exceed the 
                        highest interest rate set forth in subparagraph 
                        (C), and
                            ``(ii) assuming that the death benefit (or 
                        the portion thereof) would have been paid on 
                        the date which is 12 months after the date of 
                        the certification referred to in paragraph (3).
                    ``(C) Rates.--The interest rates set forth in this 
                subparagraph are the following:
                            ``(i) the 90-day Treasury bill yield,
                            ``(ii) the rate described as Moody's 
                        Corporate Bond Yield Average-Monthly Average 
                        Corporates as published by Moody's Investors 
                        Service, Inc., or any successor thereto, for 
                        the calendar month ending 2 months before the 
                        date on which the rate is determined, and
                            ``(iii) the rate used to compute the cash 
                        surrender values under the contract during the 
                        applicable period plus 1 percent per annum.
                    ``(D) Special rules relating to liens.--If a lien 
                is imposed against a life insurance contract with 
                respect to any amount referred to in paragraph (1)--
                            ``(i) for purposes of subparagraph (A), the 
                        amount of such lien shall be treated as a 
                        reduction (at the time of receipt) in the death 
                        benefit or cash surrender value to the extent 
                        that such benefit or value, as the case may be, 
                        is (or may become) subject to the lien, and
                            ``(ii) paragraph (1) shall not apply to the 
                        amount received unless any rate of interest 
                        with respect to any amount in connection with 
                        which such lien is imposed does not exceed the 
                        highest rate set forth in subparagraph (C).
            ``(3) Terminally ill individual.--For purposes of this 
        subsection, the term `terminally ill individual' means an 
        individual who the insurer has determined, after receipt of an 
        acceptable certification by a licensed physician, has an 
        illness or physical condition which can reasonably be expected 
        to result in death within 12 months after the date of 
        certification.
            ``(4) Exception for business-related policies.--This 
        subsection shall not apply in the case of any amount paid to 
        any taxpayer other than the insured if such taxpayer has an 
        insurable interest with respect to the life of the insured by 
        reason of the insured being a director, officer, or employee of 
        the taxpayer or by reason of the insured having a financial 
        interest in any trade or business carried on by the taxpayer.''
    (b) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendment made by this section shall apply to amounts received 
        after the date of the enactment of this Act.
            (2) Delay in application of discount rules.--Clause (i) of 
        section 101(g)(2)(A) of the Internal Revenue Code of 1986 shall 
        not apply to any amount received before the first day of the 
        first calendar month beginning more than 180 days after the 
        date of the enactment of this Act.
            (3) Issuance of rider not treated as material change.--For 
        purposes of applying section 101(f), 7702, or 7702A of the 
        Internal Revenue Code of 1986 to any contract, the issuance of 
        a qualified accelerated death benefit rider (as defined in 
        section 818(g) of such Code (as added by this Act)) shall not 
        be treated as a modification or material change of such 
        contract.

SEC. 2. TAX TREATMENT OF COMPANIES ISSUING QUALIFIED ACCELERATED DEATH 
              BENEFIT RIDERS.

    (a) Qualified Accelerated Death Benefit Riders Treated as Life 
Insurance.--Section 818 of the Internal Revenue Code of 1986 (relating 
to other definitions and special rules) is amended by adding at the end 
the following new subsection:
    ``(g) Qualified Accelerated Death Benefit Riders Treated as Life 
Insurance.--For purposes of this part--
            ``(1) In general.--Any reference to a life insurance 
        contract shall be treated as including a reference to a 
        qualified accelerated death benefit rider on such contract.
            ``(2) Qualified accelerated death benefit riders.--For 
        purposes of this subsection, the term `qualified accelerated 
        death benefit rider' means any rider on a life insurance 
        contract which provides for a distribution to an individual 
        upon the insured becoming a terminally ill individual (as 
        defined in section 101(g)(3)).''
    (b) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

Summary: Amends the Internal Revenue Code to exclude from gross income as death benefits amounts received under a life insurance contract for certain terminally ill individuals. Allows insurance companies to issue accelerated death benefit riders on life insurance contracts.