Episode 85 of the LIFE Pod is up. Carlo Viqueira and I spend it on two acronyms that shape every permanent life insurance policy sold in this country, even though almost no policyholder has heard them: TEFRA and DEFRA.
Start with the history, because it explains everything that follows. Before the early 1980s there was no sharp legal line between life insurance and a tax-favored savings account with a small death benefit attached. Congress noticed. TEFRA in 1982 and DEFRA in 1984 drew the line, and it has held ever since. To be treated as life insurance for tax purposes, a contract has to carry a meaningful amount of death benefit above its cash value. The industry calls that gap the corridor.
The corridor is why you can't simply hand a carrier a large check and call the result insurance. The more cash you put in, the more death benefit the contract is required to carry alongside it, and death benefit is not free. So the central design question in any high cash value policy is this one: how much premium can this contract absorb before the rules force it to carry more death benefit than you want to pay for?
DEFRA answered that by giving designers two tests, and the choice between them is a real fork in the road. One caps the premium dollars going in and permits a leaner death benefit. The other allows funding to run higher but demands a larger corridor the whole way. Neither is the better test in the abstract. They fit different ages, different funding horizons, and different reasons for owning the policy, which is most of what the episode digs into.
There's also a recent change that got very little attention outside the industry. Effective for policies issued starting in 2021, Congress lowered the interest rate assumptions built into Section 7702. In plain terms, a policy issued today can accept more premium relative to its death benefit than the identical design could have accepted a few years earlier. That is a genuine expansion of funding capacity, and it means older rules of thumb about how much a policy can hold are out of date.
This is tax law, and I'm a licensed insurance broker, not a CPA or an attorney. The episode is meant to make you a better-informed buyer, not to settle your tax position. Before you sign a design that pushes toward the funding limits, have your tax professional look at it alongside the illustration.
Watch below or at this link. The related limit most people run into first, the one that separates a policy from a modified endowment contract, is explained at the MEC line. And when you're ready to look at an actual design, Build a Life LOC walks the decisions one at a time.