The IRS rarely rules on issues involving life insurance and annuity contracts, so recent IRS private letter rulings 202625002 and 202625003 are noteworthy. The rulings involve a universal life insurance contract with an annuity rider providing for installment payments that constitute an immediate annuity. The ruling concludes that the two portions of the product – the base contract and the annuity rider – should be analyzed as separate contracts under the Code. As a result, there are no adverse consequences as long as each portion meets the applicable rules.

The favorable rulings apply notwithstanding that the fixed installment annuity payments under the rider will be used to pay premiums under the life insurance contract where they will become part of the policyholder's tax basis. The annuity payments would be taxable under the normal Code section 72 rules. It is also noteworthy that the annuity rider may be issued as an IRA annuity under Code section 408(b).

The product design addressed in the rulings provides a way for policyholders to combine different insurance company products to meet their particular financial needs.