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.

But this safe harbor may produce a value that is too high because often, the only amount a policyholder can obtain as a practical matter in selling or surrendering the policy is its cash surrender value, AALU and NAIFA say.

In many cases, there is no viable market for disposition of a life insurance contract other than surrender, they say.

If it can be shown that no manipulation of cash surrender value has occurred, the groups say, and traditional long-accepted means of establishing that value have been utilized, there is no reason why those means, rather than the interim safe harbor, should not be the preferred standard.

The groups add that the proposed safe harbor appears to describe the accumulation amount that has become a standard characteristic of universal life policies. However, they say, this characteristic has not been employed in structuring traditional cash value policies.

The safe harbor, AALU and NAIFA say, will create substantial difficulty and additional administrative costs when used as a measure of the appropriate practical valuation of non-UL policies.

We may thus be faced with a safe harbor that is unrealistic and non-usable in connection with a major classification of permanent life insurance, they say.

AALU and NAIFA say they believe the interim safe harbor computation should be modified to eliminate the cash value standard and provide simply that the PERC amount can be accepted for determining a contracts fair market value.

The groups also are asking Treasury for transition relief for life insurance contracts other than those targeted by Treasury. They noted that the guidance will be effective back to Feb. 13, 2004, and apply to all policies issued prior to that.

Because the guidance significantly alters the law, the groups are asking Treasury to grandfather contracts issued prior to Feb. 13, 2004, and allow them to rely on the prior law.


Reproduced from National Underwriter Edition, May 21, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.