{"data":{"id":"us/26-cfr-1.72-7","jurisdiction":"us","citation":"26 CFR 1.72-7","heading":"-7 Adjustment in investment where a contract contains a refund feature.","body":"(a) Definition of a contract containing a refund feature. A contract to which section 72 applies, contains a refund feature if:\n(1) The total amount receivable as an annuity under such contract depends, in whole or in part, on the continuing life of one or more persons,\n(2) The contract provides for payments to be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a specified amount or a stated number of payments has not been paid to the annuitant or annuitants prior to death, and\n(3) Such payments are in the nature of a refund of the consideration paid. See paragraph (c)(1) of § 1.72-11.\n(b) Adjustment of investment for the refund feature in the case of a single life annuity. Where a single life annuity contract to which section 72 applies contains a refund feature and the special rule of paragraph (d) of this section does not apply, the investment in the contract shall be adjusted in the following manner:\n(1) Determine the number of years necessary for the guaranteed amount to be fully paid by dividing the maximum amount guaranteed as of the annuity starting date by the amount to be received annually under the contract to the extent such amount reduces the guaranteed amount. The number of years should be stated in terms of the nearest whole year, considering for this purpose a fraction of one-half or more as an additional whole year.\n(2) Consult Table III or VII (whichever is applicable) of § 1.72-9 for the appropriate percentage under the whole number of years found in subparagraph (1) of this paragraph and the age (as of the annuity starting date) and, if applicable, sex of the annuitant.\n(3) Multiply the percentage found in subparagraph (2) of this paragraph by whichever of the following is the smaller: (i) The investment in the contract found in accordance with § 1.72-6 or (ii) the total amount guaranteed as of the annuity starting date.\n(4) Subtract the amount found in subparagraph (3) of this paragraph from the investment in the contract found in accordance with § 1.72-6.\nThe resulting amount is the investment in the contract adjusted for the present value of the refund feature without discount for interest and is to be used in determining the exclusion ratio to be applied to the payments received as an annuity. The percentage found in Tables III or VII shall not be adjusted in a manner described in paragraph (a)(2) of § 1.72-5. These principles may be illustrated by the following examples:\nExample 1.\nOn January 1, 1954, a husband, age 65, purchased for $21,053, an immediate installment refund annuity payable $100 per month for life. The contract provided that in the event the husband did not live long enough to recover the full purchase price, payments were to be made to his wife until the total payments under the contract equaled the purchase price. The investment in the contract adjusted for the purpose of determining the exclusion ratio is computed in the following manner:\nCost of the annuity contract (investment in the contract, unadjusted) $21,053\nAmount to be received annually $1,200\nNumber of years for which payment guaranteed ($21,053 divided by $1,200) 17.5\nRounded to nearest whole number of years 18\nPercentage located in Table III for age 65 (age of the annuitant as of the annuity starting date) and 18 (the number of whole years) (percent) 30\nSubtract value of the refund feature to the nearest dollar (30 percent of $21,053) $6,316\nInvestment in the contract adjusted for the present value of the refund feature without discount for interest $14,737\nExample 2.\nAssume the same facts as in example (1), except that the total investment in the contract was made after June 30, 1986. The investment in the contract adjusted for the purpose of determining the exclusion ratio is computed as follows:\nCost of the annuity contract (investment in the contract, unadjusted) $21,053\nAmount to be received annually $1,200\nNumber of years for which payment guaranteed ($21,053 ÷ $1,200) 17.5\nRounded to nearest whole number of years 18\nPercentage in Table VII for age 65 and 18 years (percent) 15\nSubtract value of the refund feature to the nearest dollar (15 percent of $21,053) $3,158\nInvestment in the contract adjusted for the present value of the refund feature without discount for interest $17,895\nExample 3.\nAssume the same facts as in example (1), except that the pre-July 1986 investment in the contract is $10,000 and the post-June 1986 investment in the contract is $11,053. If the annuitant makes the election described in § 1.72-6(d)(6), separate computations must be performed pursuant to § 1.72-6(d) to determine the adjusted investment in the contract. The pre-July 1986 investment in the contract and the post-June 1986 investment in the contract adjusted for the purpose of determining the exclusion ratios are, respectively, $7,000 and $9,395, determined as follows:\nPre-July 1986 investment in the contract (unadjusted) $10,000\nPre-July 1986 portion of the amount to be received annually ($10,000/$21,053 × $1,200) $570.00\nNumber of years for which payment guaranteed ($10,000 ÷ $570) 17.50\nRounded to nearest whole number of years 18\nPercentage in Table III for age 65 and 18 years (percent) 30\nSubtract value of the refund feature to the nearest dollar (30 percent of $10,000) $3,000\nPre-July 1986 investment in the contract adjusted for the present value of the refund feature without discount for interest $7,000\nPost-June 1986 investment in the contract (unadjusted) $11,053\nPost-June 1986 portion of the amount to be received annually ($11,053/$21,053 × $1,200) $630\nNumber of years for which payment guaranteed ($11,053 ÷ $630) 17.54\nRounded to nearest whole number of years 18\nPercentage in Table VII for age 65 and 18 years (percent) 15\nSubtract value of the refund feature to the nearest dollar (15 percent of $11,053) $1,658\nPost-June 1986 investment in the contract adjusted for the present value of the refund feature without discount for interest $9,395\nIf, in the above examples, the guaranteed amount had exceeded the investment in the contract (or applicable portion thereof), the percentage found in Table III or VII (whichever is applicable) should have been applied to the lesser of these amounts since any excess of the guaranteed amount over the investment in the contract (as found under § 1.72-6) would not have constituted a refund of premiums or other consideration paid. In such a case, however, a different multiple might have been obtained from Table III or VII (whichever is applicable) since the number of years for which payments were guaranteed would have been greater.\n(c) Adjustment of investment for the refund feature in the case of a joint and survivor annuity. (1) Except as provided in paragraph (c)(2) of this section, if a joint and survivor annuity contract described in paragraph (b) (1), (2) or (6) of § 1.72-5 contains a refund feature and the special rule of paragraph (d) of this section does not apply, the investment in the contract shall be adjusted in the following manner:\n(i) Find the percentage determined under the following formula:\nIn which:\nV = The percentage, rounded to the nearest whole percent,\nx = The age at the nearest birthday of the primary annuitant,\ny = The age at the nearest birthday of the survivor annuitant,\nN = The guaranteed amount divided by the annual annuity payable to the primary annuitant, rounded to the nearest integer,\nP = The annual annuity continued to the survivor annuitant divided by the annual annuity payable to the primary annuitant,\n(ii) Multiply the percentage found in paragraph (c)(1)(i) of this section by the lesser of (A) the investment in the contract found in accordance with § 1.72-6, or (B) the total amount guaranteed as of the annuity starting date.\n(iii) Subtract the amount found in paragraph (c)(1)(ii) of this section from the investment in the contract found in accordance with § 1.72-6.\nIn the case of a contract providing for payments to be made to two persons in the manner described in paragraph (b)(6) of § 1.72-5, this paragraph (c)(1) is applied as though the older person were the primary annuitant and the younger person were the survivor annuitant. For purposes of this paragraph (c)(1), the number of survivors at agex (lx) is determined under the following table:\nx lx\n5 1000000.\n6 999729.\n7 999493.\n8 999284.\n9 999069.\n10 998849.\n11 998620.\n12 998382.\n13 998135.\n14 997876.\n15 997606.\n16 997322.\n17 997025.\n18 996714.\n19 996387.\n20 996044.\n21 995684.\n22 995304.\n23 994905.\n24 994484.\n25 994041.\n26 993573.\n27 993080.\n28 992563.\n29 992024.\n30 991461.\n31 990876.\n32 990269.\n33 989638.\n34 988984.\n35 988303.\n36 987593.\n37 986846.\n38 986055.\n39 985210.\n40 984298.\n41 983310.\n42 982230.\n43 981046.\n44 979742.\n45 978302.\n46 976709.\n47 974945.\n48 972992.\n49 970832.\n50 968447.\n51 966000.\n52 963313.\n53 960375.\n54 957175.\n55 953705.\n56 949954.\n57 945912.\n58 941568.\n59 936908.\n60 931903.\n61 926451.\n62 920540.\n63 914090.\n64 907011.\n65 899221.\n66 890428.\n67 880797.\n68 870298.\n69 858904.\n70 846565.\n71 832316.\n72 816861.\n73 800078.\n74 781837.\n75 762012.\n76 740743.\n77 717689.\n78 692780.\n79 665977.\n80 637260.\n81 607339.\n82 575531.\n83 541919.\n84 506647.\n85 469931.\n86 432459.\n87 394138.\n88 355393.\n89 316712.\n90 278663.\n91 242020.\n92 207150.\n93 174602.\n94 144828.\n95 118151.\n96 94871.7\n97 74863.6\n98 58042.2\n99 44176.1\n100 32956.4\n101 24044.8\n102 17104.1\n103 11815.5\n104 7886.75\n105 5054.94\n106 3086.95\n107 1778.82\n108 955.465\n109 470.955\n110 208.668\n111 80.7899\n112 26.2340\n113 6.69620\n114 1.19385\n115 .111460\n(2) If the multiples in Tables I through IV of § 1.72-9 are used to determine any portion of the expected return under a contract described in paragraph (c)(1) of this section, only the post-June 1986 investment in the contract (if any) shall be adjusted in the manner described in paragraph (c)(1) of this section, and the pre-July 1986 investment in the contract shall, in the case of a contract described in paragraph (b) (1) or (6) of § 1.72-5, be adjusted in the following manner:\n(i) Determine the number of years necessary for the guaranteed amount to be fully paid by dividing the maximum amount guaranteed as of the annuity starting date by the amount to be received annually under the contract. The number of years should be stated in terms of the nearest whole year, considering for this purpose a fraction of one-half or more as an additional whole year.\n(ii) Consult Table III of § 1.72-9 for the appropriate percentages under the whole number of years found in subdivision (i) of this subparagraph and the age (as of the annuity starting date) and sex of each annuitant. If the annuitants are not of the same sex, substitute for the female annuitant a male annuitant 5 years younger, or for the male annuitant a female annuitant 5 years older, so that Table III will be entered in both cases with the ages of annuitants of the same sex.\n(iii) Find the sum of the two percentages found in accordance with subdivision (ii) of this subparagraph.\n(iv) To the age of the elder of the two annuitants (as determined under subdivision (ii) of this subparagraph), add the number of years (indicated in the table below) opposite the number of years by which such annuitants' ages differ:\nNumber of years difference in age (2 male annuitants or 2 female annuitants) Addition to older age in years\n0 to 1, inclusive 9\n2 to 3, inclusive 8\n4 to 5, inclusive 7\n6 to 8, inclusive 6\n9 to 11, inclusive 5\n12 to 15, inclusive 4\n16 to 20, inclusive 3\n21 to 27, inclusive 2\n28 to 42, inclusive 1\nOver 42 0\n(v) Consult Table III for the appropriate percentage under the whole number of years found in subdivision (i) of this subparagraph and the age and sex of the elder annuitant as adjusted under subdivision (iv) of this subparagraph.\n(vi) Subtract the percentage obtained in subdivision (v) of this subparagraph from the sum of the percentages found under subdivision (iii) of this subparagraph. If the result is less than one, subdivisions (vii) and (viii) of this subparagraph shall be disregarded and no adjustment made to the investment in the contract.\n(vii) Multiply the percentage found in subdivision (vi) of this subparagraph by whichever of the following is the smaller: (A) the investment in the contract found in accordance with § 1.72-6 or (B) the total amount guaranteed as of the annuity starting date.\n(viii) Subtract the amount found in subdivision (vii) of this subparagraph from the investment in the contract found in accordance with § 1.72-6.\n(3) The principles of this paragraph (c) may be illustrated by the following examples:\nExample 1.\nPrior to July 1, 1986, Taxpayer A, a 70-year-old male, purchases a joint and last survivor annuity for $33,050. The contract provides for payments of $100 a month to be paid first to himself for life and then to B, his 40-year-old daughter, if she survives him. The contract further provides that in the event both die before ten years' payments have been made, payments will be continued to C, a beneficiary, or to C's estate, until ten years' payments have been made. If there is no post-June 1986 investment in the contract, the investment in the contract adjusted for the purpose of determining the exclusion ratio is computed in the following manner:\nCost of the annuity contract (investment in the contract unadjusted) $33,050\nGuaranteed amount ($1,200 × 10) $12,000\nPercentage in Table III for male, age 70 (or female, age 75) for duration of the guarantee (10) 21\nPercentage in Table III for female, age 40 (or male, age 35) for duration of the guarantee (10) 2\nSum of percentages obtained 23\nDifference in years of age between two males, aged 70 and 35 (or 2 females, aged 75 and 40) 35\nAddition, in years, to older age 1\nPercentage in Table III for male one year older than A 22\nDifference between percentages obtained (23 percent less 22 percent) 1\nValue of the refund feature to the nearest dollar (1 percent of $12,000) $120\nInvestment in the contract adjusted for present value of the refund feature $32,930\nExample 2.\nThe facts are the same as in example (1), except that the total investment in the contract was made after June 30, 1986, A is 73 years of age, and B is A's 70 year old spouse. The percentage determined under the formula in paragraph (c)(1)(i) of this section is two percent. Thus, the amount determined under paragraph (c)(1)(ii) of this section is $240 (2 percent of $12,000), and the investment in the contract adjusted for the present value of the refund feature is $32,810 ($33,050—$240).\n(4) If an annuity described in paragraph (b) of § 1.72-5 contains a refund feature and the manner of determining the adjustment to the investment in the contract (or to any part of such investment) is not prescribed or requires use of the formula in paragraph (c)(1)(i) of this section, the Commissioner will determine the amount of the adjustment upon request. The request must contain the date of birth of each annuitant, the guaranteed amount, the annual annuity payable to each annuitant, and the annuity starting date. Send the request to the Commissioner of Internal Revenue, Attention: OP:E:EP:GA, Washington, D.C. 20224.\n(d) Adjustment of investment in the contract where paragraph (b)(3) of § 1.72-2 applies to payments. (1) If paragraph (b)(3) of § 1.72-2 applies to payments to be made under a contract and this section also applies because of the provision for a refund feature, an adjustment shall be made to the investment in the contract in accordance with this paragraph before making the computations required by paragraph (d)(3) of § 1.72-4 and paragraph (d)(7) of § 1.72-5. In the case of the guarantee of a specified amount, the adjustment shall be made by applying the appropriate multiple from Table III or VII (whichever is applicable), as otherwise determined under this section, to the investment in the contract or the guranteed amount, whichever is the lesser. The guarantee period shall be found by dividing the amount guaranteed by the amount determined by placing the payments received during the first taxable year (to guaranteed amount) on an annual basis. Thus, if monthly payments are first received by a taxpayer on a calendar year basis in August, his total payments (to the extent that they reduce the guaranteed amount) for the taxable year would be divided by 5 and multiplied by 12. The guaranteed amount would then be divided by the result of this computation to obtain the guarantee period. If the contract merely guarantees that proceeds from a unit or units of a fund shall be paid for a fixed number of years or the life (or lives) of an annuitant (or annuitants), whichever is the longer, the fixed number of years is the guarantee period. The appropriate percentage in Table III or VII shall be applied to whichever of the following is the smaller: (i) the investment in the contract; or (ii) the product of the payments received in the first taxable year, placed on an annual basis, multiplied by the number of years for which payment of the proceeds of a unit or units is guaranteed.\n(2) The principles of this paragraph may be illustrated by the following examples:\nExample 1.\nTaxpayer A, a 50-year-old male purchases for $25,000 a contract which provides for variable monthly payments to be paid to him for his life. The contract also provides that if he should die before receiving payments for fifteen years, payments shall continue according to the original formula to his estate or beneficiary until payments have been made for that period. Beginning with the month of September, A receives payments which total $450 for the first taxable year of receipt. This amount, placed on an annual basis, is $1,350 ($450 divided by 4, or $112.50; $112.50 multiplied by 12, or $1,350). If there is no post-June 1986 investment in the contract, the guaranteed amount is considered to be $20,250 ($1,350 × 15), and the multiple from Table III (found in the same manner as in paragraph (b) of this section), 9 percent, applied to $20,250 (since this amount is less than the investment in the contract), results in a refund adjustment of $1,822,50. The latter amount, subtracted from the investment in the contract of $25,000, results in an adjusted investment in the contract of $23,177.50. If A dies before receiving payments for 15 years and the remaining payments are made to B, his beneficiary, B shall exclude the entire amount of such payments from his gross income until the amounts so received by B, together with the amount received by A and excludable from A's gross income, equal or exceed $25,000. Any excess and any payments thereafter received by B shall be fully includible in gross income.\nExample 2.\nAssume the same facts as in example (1), except that the total investment in the contract was made after June 30, 1986. The applicable multiple found in Table VII is 3 percent. When this is applied to the guaranteed amount of $20,250, it results in a refund adjustment of $607.50. The adjusted investment in the contract in $24,392.50 ($25,000—$607.50).\n(e) Adjustment of the investment in the contract where more than one annuity element is provided for a single consideration. In the case of contracts to which paragraph (b) of § 1.72-6 applies for the purpose of allocating the investment in the contract to two or more annuity elements which are provided for a single consideration, if one or more of such elements involves a refund feature, the portion of the investment in the contract properly allocable to each such element shall be adjusted for the refund feature before aggregating all the investments in order to obtain the exclusion ratio which is to apply to the contract as a whole.\nExample 1.\nIf taxpayer A, an insured 70 years of age, upon maturity of an endowment policy which cost him a net amount of $86,000, elected a dual settlement consisting of (1) monthly payments for his life aggregating $4,146 per year with 10 years' payments certain, and (2) monthly payments for his 60-year-old brother, B, aggregating $2,820 per year with 20 years' payments certain, the exclusion ratio to be used by both A and B if there is no post-June 1986 investment in the contract would be determined in the following manner:\nA's expected return (A's payments per year of $4,146 multiplied by his life expectancy from Table 1 of 12.1) $50,166.60\nB's expected return (B's payments per year of $2,820 multiplied by his life expectancy from Table 1 of 18.2) $51,324.00\nSum of expected returns to be used in determining exclusion ratio $101,490.60\nPercentage of total expected return attributable to A's expectancy of life ($50,166.60 ÷ $101,490.60) 49.4\nPercentage of total expected return attributable to B's expectancy of life ($51,324 ÷ $101,490.60) 50.6\nPortion of investment in the contract allocable to A's annuity (49.4 percent of $86,000) $42,484.00\nPortion of investment in the contract allocable to B's annuity (50.6 percent of $86,000) $43,516.00\nValue of the refund feature with respect to A's annuity (percentage from Table III for male, age 70, and duration 10, or 21 percent, multiplied by lesser of guaranteed amount and allocable portion of investment in the contract, $41,460) $8,707.00\nA's allocable portion of the investment in the contract adjusted for refund feature ($42,484 less $8,707.00) $33,777.00\nValue of the refund feature with respect to B's annuity (percentage from Table III for male, age 60, and duration 20, or 25 percent, multiplied by lesser of guaranteed amount and allocable portion of investment in the contract, $43,516) $10,879.00\nB's allocable portion of the investment in the contract adjusted for refund feature ($43,516 less $10,879.00) $32,637.00\nSum of A's and B's allocable portions of the investment in the contract after adjustment for the refund feature $66,414.00\nExclusion ratio for the contract as a whole (total adjusted investment in the contract, $66,414, divided by the total expected return from above, $101,490.60) (percent) 65.4\nExample 2.\nAssume the same facts as in example (1) except that the total investment in the contract was made after June 30, 1986. The exclusion ratio to be used by both A and B would be 56.9 percent, determined as follows:\nA's expected return (A's payments per year of $4,146 multiplied by his life expectancy from Table V of 16.0) $66,336.00\nB's expected return (B's payments per year of $2,820 multiplied by his life expectancy from Table V of 24.2) $68,244.00\nSum of expected returns to be used in determining exclusion ratio $134,580.00\nPercentage of total expected return attributable to A's expectancy of life ($66,336.00 ÷ $134,580.00) 49.3\nPercentage of total expected return attributable to B's expectancy of life ($68,244.00 ÷ $134,580.00) 50.7\nPortion of investment in the contract allocable to A's annuity (49.3 percent of $86,000) $42,398.00\nPortion of investment in the contract allocable to B's annuity (50.7 percent of $86,000) $43,602.00\nValue of the refund feature with respect to A's annuity (percentage from Table VII for age 70 and duration 10, or 11 percent, multiplied by lesser of the guaranteed amount and allocable portion of investment in the contract, $41,460) $4,560.60\nA's allocable portion of the investment in the contract adjusted for refund feature ($42,398 less $4,560.60) $37,837.40\nValue of the refund feature with respect to B's annuity (percentage from Table VII for age 60 and duration 20, or 11 percent, multiplied by lesser of guaranteed amount and allocable portion of investment in the contract, $43,602) $4,796.22\nB's allocable portion of the investment in the contract adjusted for refund feature ($43,602 less $4,796.22) $38,805.78\nSum of A's and B's allocable portions of the investment in the contract after adjustment for the refund feature $76,643.18\nExclusion ratio for the contract as a whole (total adjusted investment in the contract, $76,643.18, divided by the total expected return from above, $134,580.00) (percent) 56.9\n(f) Adjustment of investment in the contract with respect to contracts subject to § 1.72-6(d). In the case of a contract to which § 1.72-6(d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, this section is applied in the manner prescribed in § 1.72-6(d) and, in particular, § 1.72-6(d)(5)(vi).","path":["Title 26—Internal Revenue","CHAPTER I—INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY","SUBCHAPTER A—INCOME TAX","PART 1—INCOME TAXES"],"source_url":"https://www.ecfr.gov/api/versioner/v1/full/2026-08-25/title-26.xml","current_through":"2026-08-25","vintage":"","retrieved_at":"2026-08-27T02:25:11Z","sha256":"6ef3c93b1516b593fb3bda21988365f92066ec26fef3ddf2cd1ed0336dddc726","source_id":"us-cfr","stale":true,"prev":"us/26-cfr-1.72-6","next":"us/26-cfr-1.72-8"},"notice":"GroundRules: Original legal text. Not legal advice."}