The Value of Life Insurance

[Guest pm01]

I have recently taken over a plan that has whole life insurance as an asset. What value do I use for valuation purposes, Surrender or Cash Value? or something else?

The owner/sponsor wants to purchase the policy from the plan, how do you determine the value of the policy for the purpose of buying it out of the plan.

Where is this covered in the Code or Regs?

Thanks

[Gary]

I believe Revenue Proc 2005-25 provides instructions with determining the fair market value of a life insurance policy for purposes of a sale and purchase.

[Guest Kabert]

The Code section 430 regs that were proposed by the IRS several months ago had something about valuation of life insurance that is a plan asset -- either in the preamble, reg, or both (don't have them handy). Also, a fiduciary buying a plan asset from the plan -- sounds like a possible PT to me. Tread carefully.

[SoCalActuary]

The Code section 430 regs that were proposed by the IRS several months ago had something about valuation of life insurance that is a plan asset -- either in the preamble, reg, or both (don't have them handy). Also, a fiduciary buying a plan asset from the plan -- sounds like a possible PT to me. Tread carefully.

The purchase of the life policy from the trust for "fair value" is an approved exemption from the PT rules. Discuss this with a knowledgable insurance agent, or better yet their legal department.

[ak2ary]

There is a PT exemption covering this, if I remember correctly.

It provides that, if the policy would be otherwise surrendered under the terms of the plan, it may be offered for sale to the participant for at least the amount that the plan would have realized under a surrender. Otherwise, the transaction is a prohibited transaction.

Later guidance from the IRS said that, in the event that the price paid by the participant for the policy was less than the fair market value of the policy, the participant would have a taxable event equal to the difference between the price paid for the policy and the policy's market value. This was to address so called "Springing Cash Value" policies that had depressed surrender values for several years and then after the participant had purchased the policy for its pitiful residual value, surrender charges would lapse and the policy would grow to its market value.

The determination of the market value of the policy is slippery... IRS guidance looks at things like the terminal reserves under the policy etc... and as a result some policies were designed to hold down those reserves artificially. The IRS has commented that, in those cases, the artificially low terminal reserve does not affect the market value of the policy and another proper measurement should be substituted... this is my casual observer view but, as you can see, you really need an expert to do this right.

[ak2ary]

Also lots of issues if this is an erisa plan and the owner amends the plan to require the surrender to enable this transaction at below market value

[tymesup]

You may want to look up 1035 Exchange for additional info.

[ak2ary]

The 2005 guidance apparently went further than I was aware providing that the excess of the market value of the policy over the price paid would be considered a distribution to the participant, subject to 415, and 401(a) such that if, in service, inadb before NRA the plan might be disqualified. These rules were primarily directed at 412i plans but have application here too