NU Online News Service, Feb. 26, 2004, 12:03 p.m. EST, Washington – Life insurance must be valued correctly and appropriately.[@@]
Bob Plybon, president of the Association for Advanced Life Underwriting, Falls Church, Va., says his group fears that recently proposed Internal Revenue Service guidance on Section 412(i) plans and the valuation of life insurance could interfere with proper valuation.
AALU is concerned that the formula in the proposed IRS guidance would artificially inflate the value of life insurance used in qualified plans above its fair market value. Artificially pegging the value of life insurance above its fair market value can disrupt proper planning, impose significant practical problems and set bad precedent, Plybon says.
But Plybon says AALU is continuing to analyze the proposed guidance.
“AALU will devote considerable attention to this issue over the course of the next 2 months and provide input to the government to try and find workable solutions,” Plybon says.
According to an analysis by AALU, the proposed guidance establishes a new fair market value principle for valuation of life insurance used in qualified plans.
The guidance presents a formulaic statement ? total premiums paid plus earnings less reasonable charges — that takes the form of a safe harbor, AALU says. AALU adds that the guidance says the policy cash value, without reduction for surrender charges, “may be treated” as fair market value if it satisfies the minimum formulaic amount.
That means the cash value could be the fair market value even if it were lower than the minimum formulaic amount, but that the cash value can always be treated as the fair market value if the cash value is equal to or greater than the minimum formulaic amount, AALU says.