CandleFocus

Guideline Premium and Corridor Test (GPT)

Candlefocus Editor
The GPT is applied to individual life insurance policies that have investment features. Essentially, the GPT requires insurance companies to assess the premium payments relative to the applicable policy's death benefit. The level of premiums that can be paid into the policy must fit within a certain range, or “corridor,” of the policy’s death benefit and cash value. If the premium payments enter outside of the corridor, the policy can no longer be considered life insurance under the IRS regulations.

To properly assess the GPT, insurers must consider both the death benefit and cash value portions of a policy. When determining the policy’s death benefit, the following components must be included: the guaranteed death benefit, any non-guaranteed additional features that are added on to the policy, and the policy’s cash value. The cash value of a policy includes the accumulated investment assets that are held inside the policy.

The GPT will determine whether the policy's benefits can be classified as insurance or as an investment. When the premiums paid on the policy are within the corridor, a portion of the premiums will be classified as insurance and the remainder will be considered investment payments. When outside of the corridor, all of the premiums will be classified as investment payments and are then subject to applicable taxes and fees.

The GPT helps insurers avoid taxation by ensuring that the money paid into a policy fits within the appropriate “corridor.” Properly understanding and applying the GPT allows policyholders to enjoy the full benefits of the insurance company’s products, with the assurance that the benefits can be considered tax-exempt. Knowing whether a policy meets the GPT requirements can help taxpayers save money by providing protection from unnecessary taxes and fees.

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