When there is a transfer of a life insurance policy, valuation of the insurance policy becomes necessary as the IRS requires a Form 712 Life Insurance Statement, which is a policy valuation as of the date of transfer provided by the insurance company, be included in the tax returns. There are three valuation methods used by insurance companies: Cash surrender value (CSV); Interpolated terminal reserve (ITR); or Premiums plus earnings less reasonable charges (PERC).

The CSV is the value that the policy holder gets when surrendering the insurance policy to the insurance company. The ITR uses a pro rata adjustment between the previous terminal reserve and the subsequent terminal reserve, added by the unearned premiums paid during the period. The PERC adds the premiums paid from the issuance date with dividends that purchased the insurance prior to the valuation date and the amounts credited to the policyholder from premiums and interest minus reasonable charges and distributions prior to the valuation date.

For more information on life insurance valuation, see Life Insurance Valuation, Daniel Van Vleet, wealthmanagement.com.

Posted by Jin Keol Park, Associate Editor, Wealth Strategies Journal