How to Value a Life Insurance Policy for Charitable Giving Purposes

How to Value a Life Insurance Policy for Charitable Giving Purposes

The amount of the deduction for a charitable gift of a life insurance policy is generally the lower of: (a) the Fair Market Value (FMV) of the policy; or (b) the donor’s cost basis. Therefore, where the FMV at the date of the gift is greater than the net premiums the client has paid, the deduction will be limited to the client’s net premiums. FMV is generally determined the same as for gifts of life…

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Valuing a Life Insurance Policy for Purposes of Selling it for Cash

Valuing a Life Insurance Policy for Purposes of Selling it for Cash

There are a variety of techniques for valuing life insurance for sale purposes. The appropriateness of each technique depends on the type of sale being contemplated. Sale to an unrelated third party – the value should generally be whatever the parties agree it is. That is the very essence of fair market value (assuming a willing buyer and willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge…

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Valuing Life Insurance for Income Tax Purposes

Valuing Life Insurance for Income Tax Purposes

In the case of certain income tax situations, the IRS has provided more recent guidance regarding the value of a life insurance policy. In 2005, primarily in reaction to certain perceived valuation abuses occurring with fully insured defined benefit plans (section 412(e)(3) plans, formerly known as section 412(i) plans), the IRS issued Revenue Procedure 2005-25.8 This revenue procedure applies for purposes of determining the value of life insurance distributed from a qualified plan, determining the…

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Valuing Life Insurance for Estate and Gift Tax Purposes

Valuing Life Insurance for Estate and Gift Tax Purposes

For estate and gift tax purposes the Internal Revenue Service (IRS) has provided specific guidance as to the value of a life insurance policy. Treasury Regulations sections 20.2031-1 and 25.2512-1 provide that the value of a life insurance policy, just like any other type of property, is its Fair Market Value (FMV). This is the price at which the property would change hands between a willing buyer and a willing seller; neither party being under…

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Introduction to Life Insurance Valuation

Introduction to Life Insurance Valuation

Life insurance must be valued for various reasons in a variety of income, gift, estate tax, and non-tax situations. Although one would think that the value of life insurance is simply its cash surrender value, in many situations this is not the case. When it comes to actually valuing this asset2 —because of new product designs, new reserving rules, different methodologies used by life insurance companies, different IRS rules for estate, gift and income tax…

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