I

103D CONGRESS

2D SESSION H. R. 4168

To amend the Internal Revenue Code of 1986 with respect to the treatment

of accelerated death benefits under life insurance contracts.

IN THE HOUSE OF REPRESENTATIVES

APRIL 12, 1994

Mr. FRANK of Massachusetts introduced the following bill; which was referred

to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 with respect

to the treatment of accelerated death benefits under life

insurance contracts.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. TAX TREATMENT OF PAYMENTS UNDER LIFE

4 INSURANCE CONTRACTS FOR TERMINALLY

5 ILL INDIVIDUALS.

6 (a) TREATMENT AS INSURANCE.—

7 (1) GENERAL RULE.—Section 101 of the Inter8 nal Revenue Code of 1986 (relating to certain death

9 benefits) is amended by adding at the end thereof

10 the following new subsection:
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1 ‘‘(g) TREATMENT OF AMOUNTS PAID WITH RE2 SPECT TO TERMINALLY ILL INDIVIDUALS OR INDIVID3 UALS WITH DREAD DISEASE.—

4 ‘‘(1) IN GENERAL.—For purposes of this sec5 tion, any amount paid or advanced to an individual

6 under a life insurance contract on the life of an in7 sured who is a terminally ill individual or who has

8 a dread disease shall be treated as an amount paid

9 by reason of the death of such insured.

10 ‘‘(2) TERMINALLY ILL INDIVIDUAL.—For pur11 poses of this subsection, the term ‘terminally ill indi12 vidual’ means an individual who has been certified

13 by a licensed physician as having an illness or phys14 ical condition which can reasonably be expected to

15 result in death in 24 months or less.

16 ‘‘(3) DREAD DISEASE.—For purposes of this

17 subsection, the term ‘dread disease’ means a medical

18 condition which has required or requires extraor19 dinary medical intervention without which the in20 sured would die, or a medical condition which would,

21 in the absence of extensive or extraordinary medical

22 treatment, result in a drastically limited life span.

23 ‘‘(4) ASSIGNMENT OR SALE OF CONTRACT.—

24 For purposes of this subsection—
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1 ‘‘(A) IN GENERAL.—Any amount received

2 by an individual from the sale or assignment to

3 a qualified accelerated benefits corporation of a

4 life insurance contract on the life of an insured

5 who is a terminally ill individual or who has a

6 dread disease shall be treated as an amount de7 scribed in paragraph (1). The preceding sen8 tence shall not apply to amounts for payment of

9 cash surrender values, loans, or other benefits

10 made by an insurer in accordance with the pol11 icy provisions.

12 ‘‘(B) QUALIFIED ACCELERATED BENEFITS

13 CORPORATION.—The term ‘qualified accelerated

14 benefits corporation’ means a corporation—

15 ‘‘(i) with respect to which the aggre16 gate amount of money or other property

17 received in exchange for equity in the cor18 poration, as contributions to capital, or as

19 paid-in surplus is at least $1,000,000;

20 ‘‘(ii) which is regularly engaged in

21 purchasing or taking assignment of life in22 surance contracts on the lives of insureds

23 who are terminally ill individuals or who

24 have dread diseases;
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1 ‘‘(iii)(I) which does business in a

2 State in which the insured resides and in

3 which qualifying legislation has been en4 acted (or qualifying administrative regula5 tions have been promulgated) to govern ac6 tivities described in clause (ii), and

7 ‘‘(II) the business practices of which

8 in States in which no qualifying legislation

9 has been enacted (and no qualifying ad10 ministrative regulations have been promul11 gated) do not materially differ from its

12 business practices in States in which such

13 legislation has been enacted (or such regu14 lations have been promulgated); and

15 ‘‘(iv) which pays an amount equal to

16 at least 60 percent of the face value of the

17 life insurance as consideration for the sale

18 or assignment to it of the policy.

19 ‘‘(C) QUALIFYING LEGISLATION.—For

20 purposes of subparagraph (B)(iii)—

21 ‘‘(i) the term ‘qualifying legislation’

22 means legislation enacted by a State legis23 lature which, either along or in conjunction

24 with qualifying administrative regula25 tions—
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1 ‘‘(I) imposes obligations on com2 panies regularly engaged in purchas3 ing or taking assignments of life in4 surance contracts on the lives of in5 sured who are terminally ill individ6 uals or who have dread diseases with

7 respect to confidentiality of medical

8 information, disclosure of alternatives

9 to accelerated benefits contracts, dis10 closure of tax consequences of acceler11 ated benefits contracts, and full dis12 closure to the terminally ill individual

13 or individual with a dread disease of

14 all material terms of the accelerated

15 benefits contract and the life insur16 ance policy, and

17 ‘‘(II) in order to enforce obliga18 tions described in subclause (I), au19 thorizes the examination of business

20 records and affairs of qualified accel21 erated benefits corporations, estab22 lishes procedures for investigations

23 and for cease and desist and other or24 ders, and imposes penalties for non25 compliance; and
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1 ‘‘(ii) the term ‘qualifying administra2 tive regulations’ means regulations promul3 gated by a State agency which, either

4 alone or in conjunction with the qualifying

5 legislation, impose obligations on compa6 nies regularly engaged in purchasing or

7 taking assignments of life insurance con8 tracts on lives of insureds who are termi9 nally ill individuals or who have dread dis10 eases in the areas described in clause (i)

11 and authorize the enforcement of those ob12 ligations in the manner provided in clause

13 (i).

14 ‘‘(D) TRANSITION RULE.—In the case of

15 taxable years beginning before January 1,

16 1994, a corporation conducting its business

17 substantially in accordance with the qualifying

18 legislation enacted by any State or with qualify19 ing administrative regulations promulgated by

20 any State agency shall be treated as satisfying

21 the requirements of subparagraph (C) regard22 less of whether the corporation conducts its

23 business in that State.’’

24 (2) EFFECTIVE DATE.—The amendment made

25 by this subsection shall apply to taxable years begin-
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1 ning after December 31, 1989; except that, in the

2 case of amounts received pursuant to a sale or as3 signment described in section 101(g)(4) of the Inter4 nal Revenue Code of 1986 (as added by paragraph

5 (1)), such amendment shall only apply to amounts

6 received after January 1, 1994.’’

7 (b) TAX TREATMENT OF COMPANIES ISSUING

8 QUALIFIED TERMINAL ILLNESS OR DREAD DISEASE RID9 ERS.—

10 (1) QUALIFIED TERMINAL ILLNESS OR DREAD

11 DISEASE RIDER TREATED AS LIFE INSURANCE.—

12 Section 818 (relating to other definitions and special

13 rules) is amended by adding at the end thereof the

14 following new subsection:

15 ‘‘(g) QUALIFIED TERMINAL ILLNESS OR DREAD DIS16 EASE RIDER TREATED AS LIFE INSURANCE.—For pur17 poses of this part—

18 ‘‘(1) IN GENERAL.—Any reference to life insur19 ance shall be treated as including a reference to a

20 qualified terminal illness or dread disease rider.

21 ‘‘(2) QUALIFIED TERMINAL ILLNESS OR DREAD

22 DISEASE RIDER.—For purposes of this subsection,

23 the term ‘qualified terminal, illness or dread disease

24 rider’ means any rider or addendum on, or other

25 provision of, a life insurance contract which provides
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1 for payments to an individual upon the insured be2 coming a terminally ill individual (as defined in sec3 tion 101(g)(2) or having a dread illness (as defined

4 in section 102(g)(3)).’’

5 (2) DEFINITIONS OF LIFE INSURANCE AND

6 MODIFIED ENDOWMENT CONTRACTS.—For purposes

7 of applying section 7702 or 7702A of the Internal

8 Revenue Code of 1986 to any contract (or determin9 ing whether either such section applies to such con10 tract), the issuance of a qualified terminal illness or

11 dread disease rider (as defined in section 818(g)(2)

12 of such Code) with respect to any contract shall not

13 be treated as a modification or material change of

14 such contract.

15 (3) EFFECTIVE DATE.—The amendments made

16 by this subsection shall apply to taxable years begin17 ning before, on, or after December 31, 1989.

18 (c) APPLICANTS OR RECIPIENTS UNDER PUBLIC AS19 SISTANCE PROGRAMS NOT TO BE REQUIRED TO MAKE

20 ELECTION RESPECTING ACCELERATED DEATH BENE21 FITS UNDER LIFE INSURANCE POLICIES.—

22 (1) IN GENERAL.—Part A of title XI of the So23 cial Security Act (42 U.S.C. 1301 et seq.) is amend24 ed by adding at the end thereof the following new

25 section:
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1 ‘‘TREATMENT OF ACCELERATED DEATH BENEFITS

2 ‘‘SEC. 1143. (a) IN GENERAL.—Notwithstanding any

3 other provision of law, no individual who is an applicant

4 for or recipient of aid or assistance under a State plan

5 approved under title IV, X, XIV, XVI, or XIX, of assist6 ance funded by payments under title V or XX, or of bene7 fits under the Supplemental Security Income program es8 tablished by title XVI shall—

9 ‘‘(1) be required, as a condition of eligibility for

10 (or of continuing to receive) such aid, assistance, or

11 benefits, to make an election to receive an acceler12 ated death benefit under a policy of life insurance,

13 or

14 ‘‘(2) by reason of failure to make such an elec15 tion, be denied (or suffer a reduction in the amount

16 of) such aid, assistance, or benefits.

17 ‘‘(b) ACCELERATED DEATH BENEFIT.—For pur18 poses of this section, the term ‘accelerated death benefit’

19 means any payment made under the terms of a life insur20 ance policy, while the insured individual is alive, as a re21 sult of a recalculation of the insured individual’s life ex22 pectancy.’’

23 (2) EFFECTIVE DATE.—The amendment made

24 by this subsection shall take effect on January 1,

25 1990.
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