To qualify as a life insurer for federal income tax purposes, what percent of the mean of the company's reserves must constitute life insurance reserves?

Question

Options

• A25
• B50
• Cless than 50
• Dmore than 50

• A
  13% (4)
• B
  3% (1)
• C
  6% (2)
• D
  77% (24)

Explanation

Under IRC Section 816, a company qualifies as a life insurance company for federal tax purposes only if its life insurance reserves constitute more than 50% of the mean of all its reserves - making D correct. This strict majority threshold ensures the entity is primarily in the business of life insurance, not just incidentally offering it.

Why the distractors fail:

• A (25%) is far too low - a company with only a quarter of reserves in life insurance is not predominantly a life insurer.
• B (50%) is a near-miss trap: exactly 50% does not qualify; the requirement is strictly greater than 50%.
• C (less than 50%) is the opposite of the rule - companies below the threshold are treated as property/casualty insurers for tax purposes, not life insurers.

Memory tip: Think of it as a "majority rules" test - life insurance reserves must be the majority (more than half) of total reserves for the company to be taxed as a life insurer. If life insurance doesn't dominate, neither does the life insurer tax treatment.

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