Cash Value Accumulation Test (CVAT)
Categories: Insurance, Tax, Trusts and Estates
There are tests to tell whether someone is a man or a woman. Aside from the, ahem, obvious...you can check for an Adam’s Apple…or you can examine the bone structure of a person’s fist.
Well, financial products have tests as well to determine whether or not they are insurance products or investment products. A Cash Value Accumulation Test (CVAT) determines whether a specific product should be taxed as an investment product or as an insurance policy.
Insurance products have a lot of tax benefits, like the ability to defer associated taxes. And death benefits don’t face income taxes. However, investments do face death taxes. Ask anyone who’s ever managed an estate. Or anyone who's ever...died.
Okay, so here’s an example of how this works.
Life insurance policies aren’t allowed to have a cash surrender value that is higher than the policy’s net single premium it would need to buy those future benefits. If you’ve got a whole life policy for $75,000, and the cash value is $10,000 for a 50-year-old, the net single premium must be under $10,000. This product won’t be considered life insurance if the cash surrender value exceeds the single premium.
