Life never remains idle, but it’s constantly changing. The original need for buying life insurance coverage can easily change over time, as needing income replacement for young kids isn’t necessary after retirement. These policies may also no longer be affordable, as low-interest rates and the rapidly changing equity markets having significantly impacted older policies.
One of the most simple ways to keep track of these changes is to conduct a policy review for you or your clients.
A policy review can highlight underperforming policies while also determining what is the cash value of a life insurance policy. However, it’s important to use accurate valuation methods, as many use inconsistent data or outdated information that makes it difficult to determine the cash value of a life insurance policy.
Keeping a few things in mind is always a good idea in determining your whole life policy cash value.
1) Fair Market Value
According to the IRS, the definition of Fair Market Value is the price of exchanging property between a buyer and a seller. Fair Market Value plays a key role in helping you understand the cash value of your life insurance policy.
2) Interpolated Terminal Reserve
Interpolated Terminal Reserve is a method that determines the reserve between anniversaries on a life insurance policy. This process happens by valuing an insurance policy for gift or death tax-related purposes, regardless if the policy is current during the time of making the transfer.
The formula for this calculation happens by making the proportional adjustment upward that’s between the previous and upcoming terminal reserve. The value is also determined by reducing the proportional adjustments for long-duration policies. ITR is very useful for annual renewable terms and whole life policies. However, using the ITR for universal life and term products can be very inaccurate.
3) Premiums Plus Earnings, Less Reasonable Charges (PERC)
PERC is the calculation of premiums paid from the initial time of delivery, plus any proceeds used to buy insurance before the date of valuation, plus any other amount related to the insurance policyholder due to interest and premiums, subtracting distributions, partial surrenders, withdrawals, or other types of charges before the date of valuation.
4) Revenue Procedure
The typical rule is to value the life insurance policy at the greater of PERC or ITR. However, other terms in treasury rules may leave the possible option for using other methods to determine the life insurance policy appraisal for gift tax and federal estate tax matters.
Life Insurance Policy Appraisal
One of the first steps in finding out the value of your life insurance policy is to schedule an appraisal. Requesting a formal appraisal form is a good idea because this request is often considered irrevocable in some tax situations.
Working with independent analysis from a life insurance appraiser is essential in determining the whole life policy cash value. These professionals will use real-time information from the secondary market, lifestyle credits, and the specific life expectancy of the individual.
An independent valuation will offer valuable information to determine the cash value of your life insurance policy to meet the fair market value definition provided by the IRS. Additionally, a qualified appraisal can also provide clarity for complex planning situations, which often deviate from standard methods used by life insurance providers.
How Eager Buyers are Changing the Valuation of Life Insurance
The expansion of the secondary market has changed how the marketplace views life insurance. Financial analysts are now using valuation criteria similar to private equity instead of viewing it as a fixed financial investment with a beginning and an end. Ultimately, this has created much bigger payouts and a higher acceptance of life settlements. The secondary market can also be used in various ways, such as:
• Minimizing or eliminating future premiums
• Creating additional financial security during retirement
• Adapt to changes in business
• Build short-term liquidity
• Earn valuations for bankruptcy or M&A
• Create funds for long-term care
• Produce liquidity by selling policies to fund various projects
Best Tips to Follow Today
Checking out the secondary market is essential before you reduce the face amount or surrender a life insurance policy for its cash value. Often, the value is much greater than the surrender value, especially if it’s universal life term insurance. Reaching out for a life insurance policy appraisal is an excellent option to help you know what is your client’s life insurance policy worth. And, an extra way to keep their money in motion and your commission stream active.