A Story to Demonstrate the Value of Policy Appraisals/Valuations

A few months ago I was called by an attorney who was representing the estate of an individual who died owning a $10,000,000 permanent life insurance policy on a life of a family member. The issue at hand was as follows:

– the policy had an account value of $375,000
– the surrender cash value was $210,000
– the 712 from the carrier was for $1,350,000

You see the issue?

We have an asset for which literally no party on the face of the earth would pay a cent more than the cash surrender value, and probably not even that much, but which purportedly needs to be booked on the 706 for a seven figure greater amount which drives a six figure estate tax on a value which definitively does not exist. Talk about a pissed client….

Valuing a modern life insurance policy in the face of rulings which were made in an era where these types of contracts didn’t exist has proven troublesome and there are a number of good articles talking about the issues. There are examples of term policies with enormous valuations, guaranteed universal life policies with 712s equal to the death benefit and all kinds of ridiculous numbers in between. Even if this case was in a state which did not have Draconian laws relative to life settlements, the dynamics of the situation completely eliminated the secondary market for valuation purposes. Everyone knows the formal definition of Fair Market Value but that concept is thrown out the window when 712s come into the picture. Unfortunately, there seem to be fewer answers than questions when the rubber hits the road and decisions need to be made.

This piece is not at all to talk about specifics or court cases or methodology but to talk about a potential solution; a formal life insurance policy appraisal completed by a qualified appraiser as defined by Treasury Regulation 1.170A-13(c)(5)(i).

By the way, this is not me. There is a reason I include in my description of services Policy Appraisal Assistance, and not Policy Appraisals. As is a general rule regarding my life insurance expertise, either I know the answer or I know the people who know the answer. In this case I brought a qualified life insurance appraiser to the table.

At the end of the day, the formal appraisal based on a fair market value determination built on multiple IRS regs, multiple court cases and multiple formulaic methodologies utilizing multiple discount rates determined the Fair Market Value was $430,000. (The only reason the value was that high was due to meaningful health issues regarding the insured.) The benefit of this process, if the client’s advisors are on board with the numbers and the methodology, is paying an estate tax on a value which was reduced by almost $1,000,000. I calculated the internal rate of return on the fees for the appraisal relative to the tax savings was roughly 5,000%… that’s a decent use of money.

When it comes to gifting policies, transferring them or valuing them for whatever purpose, the moral of the story is to understand the tax law, do your homework and work with experts who can coordinate the available options. The results could dramatic.


This material is for informational purposes only and should not be considered tax or legal advice. Any person needing tax or legal assistance should contact their respective advisors.

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