Agents Tell Treasury: Take Care On
Life Insurance Valuation Safe Harbor
By
Washington
A proposed Treasury Department safe harbor on the valuation of life insurance could have the unintended consequence of overly inflating the value of some policies, life insurance agents say.
In formal comments filed with Treasury, the agents urge the department to exercise care in developing a single, overarching safe harbor that is intended to target one particular perceived problem.
A safe harbor which is designed for this circumstance may not be appropriate in all scenarios and may cause unintended consequences, according to the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors.
The circumstance at issue involves the alleged suppression of cash surrender values at the time of the transfer of policies from qualified plans to participants. The participants are then able to hold the policies either to maturity or to the time when the cash surrender values are no longer subject to suppression.
AALU and NAIFA note that to address this perceived problem Treasury on Feb. 13, 2004, issued guidance on the valuation of life insurance contracts in several contexts. It appears, they add, that the guidance is intended to apply to estate and gift tax evaluations, as well.
The guidance contains an interim safe harbor which says the case value of a contract, without reduction for surrender charges, may be treated as its fair market value so long as the cash value is at least as large as a specific amount calculated by taking into account premiums, earnings and reasonable charges, sometimes called the PERC amount.
The groups noted that based on a literal interpretation of the guidance, if the cash value is less than the PERC amount, the safe harbor cannot be used. In addition, they say, if the cash value exceeds the PERC amount, only the cash value can be treated as the contracts fair market value.