Title VII, SEC. 7703. TAX TREATMENT OF ACCELERATED DEATH BENEFITS UNDER LIFE 
INSURANCE CONTRACTS. 
      (a) General Rule. Section 101 (relating to certain death benefits) is 
    amended by adding at the end thereof the following new subsection: 

      ``(g) Treatment of Certain Accelerated Death Benefits. 

      ``(1) In general. For purposes of this section, any amount distributed to 
    an individual under a life insurance contract on the life of an insured who 
    is a terminally ill individual (as defined in paragraph (3)) shall be 
    treated as an amount paid by reason of the death of such insured. 

      ``(2) Necessary conditions. 

      ``(A) Paragraph (1) shall not apply to any distribution unless 

      ``(i) the distribution is not less than the present value (determined 
    under subparagraph (B)) of the reduction in the death benefit otherwise 
    payable in the event of the death of the insured, and 

      ``(ii) the percentage derived from dividing the cash surrender value of 
    the contract, if any, immediately after the distribution by the cash 
    surrender value of the contract immediately before the distribution is 
    equal to or greater than the percentage derived by dividing the death 
    benefit immediately after the distribution by the death benefit immediately 
    before the distribution. 

      ``(B) The present value of the reduction in the death benefit occurring 
    on the distribution must be determined by 

      ``(i) using as the discount rate a rate not to exceed the highest rate 
    set forth in subparagraph (C), and 

      ``(ii) assuming that the death benefit (or the portion thereof) would 
    have been paid at the end of a period that is no more than the insured's 
    life expectancy from the date of the distribution or 12 months, whichever 
    is shorter. 

      ``(C) Rates. The rates set forth in this subparagraph are the following: 

      ``(i) the 90-day Treasury bill yield, 

      ``(ii) the rate described as Moody's Corporate Bond Yield Average-Monthly 
    Average Corporates as published by Moody's Investors Service, Inc., or any 
    successor thereto for the calendar month ending 2 months before the date on 
    which the rate is determined, 

      ``(iii) the rate used to compute the cash surrender values under the 
    contract during the applicable period plus 1 percent per annum, and 

      ``(iv) the maximum permissible interest rate applicable to policy loans 
    under the contract. 

      ``(3) Terminally ill individual. For purposes of this subsection, the 
    term `terminally ill individual' means an individual who the insurer has 
    determined, after receipt of an acceptable certification by a licensed 
    physician, has an illness or physical condition which can reasonably be 
    expected to result in death within 12 months of the date of certification. 

      ``(4) Application of section 72(e)(10). For purposes of section 72(e)(10) 
    (relating to the treatment of modified endowment contracts), section 
    72(e)(4)(A)(i) shall not apply to distributions described in paragraph (1). 

      (b) Effective Date. The amendment made by subsection (a) shall apply to 
    taxable years beginning after December 31, 1993.