Simply put, CVAT is the acronym for Cash Value Accumulation Test, and GPT is the acronym for Guideline Premium Test.
Both of these acronyms have to do with how the Internal Revenue Service determines the tax favorability of a life insurance policy.
An insurance policy that fails to meet any requirements under IRC Section 7702 is no longer considered an insurance product and will not be eligible for the tax benefits granted to insurance products.
What are the Basic Differences?
The primary difference between CVAT and GPT is that the CVAT limits the amount of the cash value account proportionate to the death benefit in the policy, while the GPT limits the amount of premiums paid proportionate to the death benefit.
As the insured ages, the percentage of the death benefit that goes to the corridor decreases, and can be zero by age 95.
Although the Cash Value Accumulation Test does not place a limit on premium payments and generally allows the policyholder to overpay in the first seven years of the policy when compared to the funding limits under the Guideline Premium Test.
However, CVAT policies generally require a higher corridor factor in terms of both cash value and death benefit. This can impact the policy’s long-term cash accumulation, as CVAT typically has higher costs of insurance than GPT products.
There are two requirements that must be met for a policy to pass what is known as the Guideline Premium Test:
- Requirement one stipulates that there can only be a limited amount of cumulative premium paid into the said policy.
- Requirement two is based on how much cash value is relative to both the death benefit and the insured’s attained age.
On the other hand, in order to pass the Cash Value Accumulation Test – CVAT, your account value must not exceed a specified percentage of your death benefit. However, note that paying excessive premiums could still result in a Modified Endowment Contract.
The most important guidelines to follow are:
- Insurance policies that adhere to the Cash Value Accumulation Test generally perform better for policyholders who prefer to access their cash values in the policy’s early years or prefer to pay a lump sum or limited sum premium payments.
- Insurance policies that adhere to the Guideline Premium Test will typically perform better for those policyholders who prefer to accumulate cash value over a longer time period.
Why Choose CVAT?
Deciding which test will be a better solution for you is generally determined by your need and purpose for your life insurance:
When a policyholder does not want to be limited in how much they can pay into their policy and wants to maximize their death benefit, CVAT may be right for them. This method allows for flexible premium payments and can provide a larger death benefit than other options.
Why Choose GPT?
Using the Guideline Premium test is generally most beneficial for applicants who are purchase life insurance for tax-free retirement income:
- You want to pay maximum premiums and accumulate significant cash over time.
- You are accumulating the wealth required to take policy distributions (policy loans) during retirement at the expense of your policy’s death benefit.
- You decide to take death benefit option 2 so you can invest the maximum premium (non-MEC) for more than seven years and then switch to death benefit option 1.