Value of Life Insurance

[Guest csk]

Plan has 500,000 insurance policy. I have information on the "fund value" which is about $11k, but there is no "cash value" for another year. Is the "fund value" appropriate to show as a plan asset and use for valuation or is zero cash value?

[Mike Preston]

The valuation of the insurance policy is something that needs to be reasonable. I would feel very comfortable using the fund value.

[AndyH]

I have a related question that I'd love to get comments on.

Takeover insured DB plan loaded with insurance. Plan is being terminated. Three company principals all around age 62-65 had single premium policies issued years ago. Each has a face value of $400,000, has a cash value between $72,000-$100,000 and the cash values have grown 11%-12% for 2001, 3%-5% for 2002, and 3%-5% for 2003. I don't have the policies so I have no further details other than the name of the insurer and the contract numbers.

Participants are considering purchasingm(or taking a distribution of) the policies at the quoted cash value. This seems like a no-brainer for the participants. Do these cash values, with these increases and no future premiums make sense as a valid sale price from the plan's perspective?

Forget the incidental and possible discrimination issues. I'm focusing strictly on the three policies for now.

[Lame Duck]

have you looked at Rev. Proc. 2004-16, issued February 13 2004? Section 3 provides interim guidance for determining the fair market value of a life insurance policy.

[AndyH]

csk, that may be relevant to your question, but not mine.

That deals with contracts that suddenly go "boing boing boing" after being distributed. Gee, what could that be? Interesting, though. Thanks, LD.

[Belgarath]

Andy - I'm not sure what you mean when you ask if the sale makes sense from the plan perspective? Are you asking if the cash surrender value is a valid sale price from the plan perspective?

The plans I've seen with LI usually specify that the policy will be offered to the participant, either as a distribution or as a sale for the cash surrender value. The plan usually has to either transfer policies to the participants or surrender. From what you say, it sounds like a surrender value sale by the plan is valid. If the plan surrenders the policies, this is all the value the plan would receive, so this amount satisfies PTCE 92-5 or 6, I forget which one governs a saly by the plan. But maybe I'm answering something totally different than you are asking!

[AndyH]

What I am trying to get at is does do the cash value figures make sense relative to the face amounts ($400,000) and apparent rates of return 3%-5%+, or do these policies appear to be more valuable than $72,000-$100,000.

This is a little like a non-FDIC CD paying 3%-5% + but in addition, it will pay $400,000 less the CSV upon death, and the insured are in their 60s. Plus I happen to know that they worked in a toxic area. Maybe that is the source of my bias.

I guess I'm asking if these have a higher actuarial value than the CSV. I'm not familiar with the inner workings of life insurance policies to understand whether or not a CSV has some correlation to the face amount and life expectancy. I assume that it does.

[Belgarath]

You'd have to ask a product actuary. I would like to think that there is in fact a correlation. I suspect there is, particularly in an older policy that wasn't designed for a "rollout" such as those the IRS has just targeted. To my admittedly non-mathematical mind, using nothing more than the rule of 72, if you have a 100,000 CV now, at 5%, it would become 400,000 in around 29 years. That would put these folks somewhere in their 90's? So at a guess, this seems reasonable, but I'm speaking from a position of ignorance.

[AndyH]

That is an interesting approach. Thanks for the comments.

[Mike Preston]

The values certainly seem reasonable to me. Ignoring the discimiination issues is hard, though........(stop... don't type that.....uh, ok....no, wait....AGGHHHH!....^H^H^H^H^H^H^H^H^^H^H^H^H^H.........)

[AndyH]

But, Mike, calm down; everything's fine. Smooth and easy. The agent who sold these single premium policies (and a couple of dozen others) to this plan has moved on and it's in my hands. Now he sells 412(i) plans full time. He's been awful busy. Seems to take summers off, though. Nice boat.

[401 Chaos]

Andy H,

I do not have much experience working with life insurance policies in plans so take this with a grain of salt but for some gift tax / charitable contribution purposes the "replacement value" of a fully paid-up life insurance policy may be used rather than the cash surrender value. If not fully paid-up, the interpolated terminal reserve value of the policy rather than the CSV is required. Not sure how that ties into the plan asset valuation context but it does seem that what the plan could receive upon surrender for these policies could be very different from their value if the individuals looked to replace this coverage. I'd be interested to hear how you finally decide to handle. Thanks.

[Kirk Maldonado]

AndyH:

Wouldn't it be more accurate to say the guy USED to sell section 412(i) plans full time? My guess is that he is now unemployed.

[Guest KAR]

Dealing quite a bit with life insurance in plans, I would say that your value is in line with the face. Based on the 62-65 ages, the policies have probably been inforce for a while and most likely have a maturity age of around 75. I would expect that the 3-5% is the minimum contract interest rate and it probably won't exceed the minimum for a few more years.

All said, I caveat that with I also am not a product actuary. And without seeing the policy contracts and which options have been elected, who really knows.

[AndyH]

Excellent variety of feedback. It would seem that the stated CSV is appropriate. Thanks, all.

[david rigby]

It would seem that the stated CSV is appropriate.

Perhaps its just me, but I don't draw that conclusion from the postings, only that there are a few opinions not in opposition. A true judgment of "appropriate" might require more thorough sampling, and inspection of actual products.

[AndyH]

And how would I get a more thorough sampling?

It seems to me that an insurer assigned a value to something that appears (from comments thus far) to be reasonably reflective of the market value. If it is reasonable, what might the basis be for arriving at a different conclusion?

[Kirk Maldonado]

AndyH:

First, let me say that I'm not an actuary. Furthermore, I'm not particularly knowledgeable about the valuation methodologies for this purpose.

With those caveats in mind, doesn't the recent Section 412(i) guidance limit your ability to rely upon the value assigned by the insurance policy, or would that guidance be limited to the types of policies involved in those arrangments?

[AndyH]

Kirk, my quick read of that said that a cash value could be treated as fair market value provided that the cash value is at least equal to the sum of premiums paid plus certain interest and dividend credits , less reasonable mortality charges and other reasonable expenses.

That seemed to be addressing a springing cash value situation; that is not what I am dealing with. But I also read that as support for use of the cash value provided the minimum criteria is met.

[Kirk Maldonado]

Thanks for sharing your thoughts on this point.