Valuating Life Insurance Policy

Katt & Company’s recent newsletter addresses life insurance policy valuations. In the newsletter, the author states that spring-crash-values further complicate the issue of whether a taxpayer should report a policy’s account value or cash surrender value as income when policies are transferred to the insured. The IRS argues that the account value is the appropriate method, while buyers, administrator, and sellers argue for the cash surrender value method.

The newsletter also addresses Schwab v. Commissioner (136 T.C. No. 6 – 2/7/11) where the court faced the issue of deciding the proper valuation for two variable universal life insurance policies. The Court concluded that the policies’ values should be based on the guaranteed cost of insurance to the termination date of the first policy and until the second policy’s premium was paid a few months later. The author fears that the Schwab holding has only “muddied the water” when it comes to setting logical life insurance valuation methods.

See Life Insurance Policy Valuations, 13 Insurance Perspectives 9, Sep. 2011.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.