2025 Guideline Premium and Corridor Test (GPT) Explained: Costs, Benefits, and Tax Implications

Julia Kagan is a seasoned financial and consumer journalist, formerly serving as senior editor for personal finance at Investopedia.

What Is the Guideline Premium and Corridor Test (GPT)?

The Guideline Premium and Corridor Test (GPT) is a crucial IRS standard used to decide whether a life insurance policy qualifies for favorable tax treatment as insurance rather than being taxed as an investment. This test restricts the amount of premiums paid relative to the policy’s death benefit, ensuring the policy maintains its insurance character.

Key Insights

• GPT determines if an insurance product is taxed as insurance or investment income.
• It limits premium payments based on the policy’s death benefit to maintain insurance status.
• Policies emphasizing cash accumulation over death benefits typically undergo GPT evaluation.
• To meet IRS insurance criteria, a policy must have a sufficient “amount at risk,” meaning adequate death benefit protection for beneficiaries.
• GPT was established under the Deficit Reduction Act (DEFRA) of 1984 to regulate universal life insurance policies.

Understanding the Guideline Premium and Corridor Test (GPT)

The IRS uses the GPT to assess whether a life insurance policy qualifies for tax advantages. Universal life insurance policies split premiums into two parts: one covering policy costs, and the other contributing to a cash accumulation account, which can be accessed through loans or withdrawals under specific conditions.

Some policies prioritize maximizing the death benefit, requiring higher premiums initially and lower premiums later. Others focus on building cash value, starting with lower premiums that increase over time. Regardless of focus, all policies must pass either the GPT or the Cash Value Accumulation Test (CVAT) to retain their tax-advantaged status.

Implementing the Guideline Premium and Corridor Test (GPT)

The GPT is applied when policyholders aim to pay maximum premiums while maintaining a flexible death benefit or prioritize cash accumulation over death benefits. Unlike policies focused on death benefits at life expectancy, GPT-compliant policies maximize cash value growth with benefits payable at a later age.

Insurance policies that pass GPT enjoy tax-deferred growth on cash values and income tax-exempt death benefits. Failure to pass GPT results in the policy being taxed as an investment, often leading to higher tax liabilities.

Insurers can choose between GPT and CVAT when issuing a policy, with the choice affecting premiums, cash value limits, and benefits. This choice is fixed at policy issuance and cannot be changed later.

GPT and the Deficit Reduction Act (DEFRA) of 1984

Universal life insurance’s investment component led lawmakers to distinguish between traditional insurance and investment vehicles. The Deficit Reduction Act of 1984 introduced the GPT to ensure policies met IRS standards for life insurance, particularly the requirement for a sufficient “amount at risk.” This ensures policies provide genuine death benefit protection while maintaining favorable tax treatment under IRC Section 7702.

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