Which insurance arrangement, which involved insurance of a loss that had previously occurred, similarly was found not to be insurance for federal income tax purposes?

Question

Options

• Aannual statement
• Bretroactive
• Creserved
• DTax reserves

• A
  12% (3)
• B
  76% (19)
• C
  8% (2)
• D
  4% (1)

Explanation

Retroactive insurance (B) covers losses that have already occurred, which means there is no genuine transfer of risk - a foundational requirement for an arrangement to qualify as insurance for federal income tax purposes. Because the insured event is a known past loss rather than an uncertain future one, courts and the IRS have determined that premiums paid under such arrangements are not deductible as insurance premiums. Annual statement (A) is simply a regulatory financial filing required of insurers, not an insurance arrangement at all. Reserved (C) refers to funds set aside to pay future or incurred-but-unpaid claims - an accounting/reserving concept, not a coverage structure. Tax reserves (D) are actuarially computed amounts used in tax accounting for insurance companies and are likewise a balance-sheet concept, not a type of insurance arrangement.

Memory tip: Think "retro = already happened = no risk = no insurance." True insurance requires uncertainty; if the loss is in the past, there is nothing left to insure, so the IRS won't treat it as insurance.

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