Advanced Underwriting Consultants

Question of the Day – August 4

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: What is the value of a life insurance policy?

Answer: Great question!  The IRS and the courts have struggled to come up with a consistent answer to this question, in part because the Tax Code and various regulations have taken different approaches to the answer.

In general, the value of a life policy is its fair market value.  There are different approaches to calculating fair market value depending on:

  • Whether the transfer of a policy is from an employer to an employee,
  • Whether the transfer is a gift between family members
  • Whether the transfer is from a pension plan to a participant
  • Whether the transfer is from a Section 419 plan to a participant
  • Whether the transfer is to a life settlement buyer

In most cases, fair market value is defined as the amount of money a willing buyer would give a willing seller for the life policy.  In the examples above, a transfer of a life policy to a life settlement buyer is the clearest example of that kind of transaction, and should yield the most objective calculation of fair market value.

For the other situations, the Service and the courts have not provided a clear and consistent valuation path.  Look for the answer to the valuation to continue to evolve over the next few years.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.