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July 18-19, 2013July 18-19, 2013
For agent use only. Not for use with the general public. D-14073 6-13
Life Insurance
Policy Valuation
IssuesIssues
MethodsMethods
AlternativesAlternatives
IssuesIssues
MethodsMethods
AlternativesAlternatives

2. For agent use only. Not for use with the general public. D-14073 6-13
Quiz
“Fair Market Value”
“Fair Market Value” of a life insurance policy
for tax purposes
Treas. Reg. §25.2512–1
Willing buyer and a willing seller, neither being under any compulsion
to buy or to sell, and both having reasonable knowledge of relevant
facts

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

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

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

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

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

8. For agent use only. Not for use with the general public. D-14073 6-13
Revenue Procedure 2005-25
Nonexclusive safe harbor valuation

Section 79

Section 83

Section 402

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

10. For agent use only. Not for use with the general public. D-14073 6-13
Result
Multiple values –
You decide Mr. Client
which number represents
“fair market value”

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

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

13. For agent use only. Not for use with the general public. D-14073 6-13
Incentive Life
Adjusted ITR $446,560.05
Adjusted PERC $94,794.42
Valuation $446,560.05
I ncentive Life
Issue date 1/28/1999
Account value
 $94,794.42
Cash surrender value
 $84,926.59

14. For agent use only. Not for use with the general public. D-14073 6-13
Final Thoughts
Know the carrier’s position for calculating
valuations