Advanced ForumAdvanced ForumJuly 18-19, 2013July 18-19, 2013

For agent use only. Not for use with the general public. D-14073 6-13

Life Insurance Policy ValuationLife Insurance

Policy Valuation

Issues Issues Methods Methods

AlternativesAlternatives

Issues Issues Methods Methods

AlternativesAlternatives

For agent use only. Not for use with the general public. D-14073 6-13

QuizQuiz

“Fair Market Value”

“Fair Market Value” of a life insurance policy for tax purposes

Treas. Reg. §25.2512–1Willing buyer and a willing seller, neither being under any

compulsion to buy or to sell, and both having reasonable knowledge of relevant facts

For agent use only. Not for use with the general public. D-14073 6-13

Revenue Ruling 59-195Revenue Ruling 59-195

Referenced Treas. Reg. §25.2512-6 in applying Interpolated Terminal Reserve (ITR)

Treas. Reg. §25.2512-6 …contract which has been in force for some time and

on which further premium payments are to be made, the value may be approximated by adding to the interpolated terminal reserve…proportionate part of the gross premium last paid…

For agent use only. Not for use with the general public. D-14073 6-13

Interpolated Terminal ReserveInterpolated Terminal Reserve

“Terminal reserve” Money the insurance company is putting

aside—reserving—to pay the death claim

“Interpolated” Policy transfer = anniversary date Prior year’s terminal reserve adjusted—

interpolated—to allow for the growth in the reserve between the past anniversary date and the date of transfer

For agent use only. Not for use with the general public. D-14073 6-13

ChallengesChallenges

Products in existence

Revenue Ruling 59-195 and ITR Referenced the gift tax rules in Treas. Reg.

§25.2512-6 in applying ITR to a policy sale

Treas. Reg. §25.2512-6 …when the gift is of a contract which has been in force for

some time and on which further premium payments are to be made, the value may be approximated by adding to the interpolated terminal reserve at the date of the gift the proportionate part of the gross premium last paid before the date of the gift which covers the period extending beyond that date.

For agent use only. Not for use with the general public. D-14073 6-13

End of SimplicityEnd of Simplicity

Universal life

Variable universal life

Indexed universal life

Guaranteed no-lapse universal life

Level term

(1-h)([t-1]V(x) + [t]P(x)) + h*[t]V(x)

h = 1/2 -> [t]MV(x) = 0.5*([t-1]V(x) + P(x) + [t]V(x))

For agent use only. Not for use with the general public. D-14073 6-13

ReservesReserves

For “ITR” there is:Statutory reserve with deficiency reserve

Statutory reserve without deficiency reserve

Tax reserve

Actuarial Guideline (AG) 38 statutory reserve with deficiency reserve

AG 38 statutory reserve without deficiency reserve

AG 38 tax reserve with deficiency reserve

AG 38 tax reserve without deficiency reserve

For agent use only. Not for use with the general public. D-14073 6-13

Revenue Procedure 2005-25Revenue Procedure 2005-25

Nonexclusive safe harbor valuation Section 79 Section 83 Section 402

For agent use only. Not for use with the general public. D-14073 6-13

The Safe HarborsThe Safe Harbors

The Fair Market Value of a Life Insurance Policy

Greater of:Adjusted ITR Adjusted PERC

Amount

The ITR value

plus any unearned premiums

plus a pro rata portion of a reasonable estimate of dividends expected to be paid for that policy year based on the company experience

The PERC (Premiums plus Earnings less Reasonable Charges incurred) amount

times average surrender factor

For agent use only. Not for use with the general public. D-14073 6-13

ResultResult

Multiple values –

You decide Mr. Client which number represents “fair market value”

For agent use only. Not for use with the general public. D-14073 6-13

Does it matter?Does it matter?

Incentive Life

Issue date 1/28/1999

Account value $94,794.42

Cash surrender value

$84,926.59

Champion 2000

Issue date 4/28/1994

Account value $153,777.71

Cash surrender value

$153,777.71

AXA

For agent use only. Not for use with the general public. D-14073 6-13

Champion 2000Champion 2000

Adjusted ITR $230,492.53

Adjusted PERC$153,777.71

Valuation $230,492.53

Champion 2000

Issue date 4/28/1994

Account value $153,777.71

Cash surrender value $153,777.71

For agent use only. Not for use with the general public. D-14073 6-13

Incentive LifeIncentive Life

Adjusted ITR $446,560.05

Adjusted PERC $94,794.42

Valuation $446,560.05Incentive Life

Issue date 1/28/1999

Account value $94,794.42

Cash surrender value $84,926.59

For agent use only. Not for use with the general public. D-14073 6-13

Final ThoughtsFinal Thoughts

Know the carrier’s position for calculating valuations