What is DEFRA?
DEFRA, or the Deficit Reduction Act of 1984, is a federal law aimed at reducing the national deficit by implementing various tax and spending measures. In the insurance industry, DEFRA set specific guidelines that impact how life insurance policies are structured, particularly concerning their tax treatment. These regulations ensure that life insurance policies meet certain criteria to retain favorable tax advantages.
One of the key provisions of DEFRA relates to the definition of a life insurance contract. The act established guidelines on the maximum allowable premiums for life insurance policies relative to their death benefits. This was done to prevent individuals from using life insurance as a tax-sheltered investment vehicle without providing adequate insurance coverage. Policies that comply with DEFRA maintain tax-deferred growth on the cash value and tax-free death benefits for beneficiaries.
DEFRA, along with other laws like TEFRA, set the foundation for how life insurance is regulated, focusing on maintaining the balance between providing legitimate life insurance protection and preventing misuse for tax purposes. Understanding DEFRA’s impact is essential for policyholders who want to ensure their life insurance policies remain compliant and retain their tax-favored status.
