Life insurance must be valued for various reasons in a variety of income, gift, estate tax, and non-tax situations. Although one would think that the value of life insurance is simply its cash surrender value, in many situations this is not the case. When it comes to actually valuing this asset2 —because of new product designs, new reserving rules, different methodologies used by life insurance companies, different IRS rules for estate, gift and income tax purposes, and other factors—there can be a great deal of uncertainty raising the potential for dispute and litigation. In order to best serve your clients, it is important that you have a basic understanding of how to value life insurance in the following situations.
- When determining a person’s net worth, generally the value can easily be determined by simply contacting the insurance company and requesting the policy’s current cash surrender value.
- When a policy is being gifted to a trust or heirs.
- When a policy is being gifted to a charity.
- When the policy owner has predeceased the insured and the policy is being valued for purposes of completing the deceased owner’s estate tax return.
- When a policy is being distributed by an employer to an employee.
- When a policy is being distributed or purchased from a qualified retirement plan.
- Where a policy is being sold by one party to another.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM