NU Online News Service, June 10, 2004, 1:42 p.m. EDT, Washington – The Internal Revenue Service should revise a proposed safe harbor for the valuation of life insurance contracts.[@@]
Representatives for insurance agents and insurers made that argument at a recent IRS hearing on proposed life policy valuation regulations. The proposed regulations, issued in February, were developed partly in response to concerns about Section 412(i) defined benefit pension plans.
It is appropriate for the IRS to establish guidelines for valuing life policies for tax purposes, but the proposed regulations have serious shortcomings, industry representatives said.
One part of the proposed regulations establishes a new safe harbor for fair market value. The safe harbor value is the sum of all the premiums paid on the policy, plus all earnings, minus reasonable mortality charges and other reasonable charges actually charged and expected to be paid.
Under the proposal, the cash surrender value of the policy can be treated as the fair market value so long as it is at least as large as the safe harbor value.
But Lawrence Raymond, secretary of the Association for Advanced Life Underwriting, said life insurance agents have concerns about the IRS approach. He testified on behalf of both AALU and the National Association of Insurance and Financial Advisors, which are both based in Falls Church, Va.
In general, Raymond said, agents are concerned about the establishment of uniform valuation standards for most purposes under the Internal Revenue Code.
Raymond noted that in issuing its proposal the IRS was concerned about perceived problems involving the distribution of life insurance contracts from retirement plans. But, as proposed, the safe harbor appears to apply to several life insurance valuation scenarios, including distributions or sales from retirement plans, compensatory transfers, and estate and gift tax transactions, he said.
“Because of the diverse nature of these scenarios and the underlying contracts, we urge the IRS to exercise care in establishing uniform valuation standards that are targeted at a problem of limited scope,” Raymond said.
The safe harbor formula should be simplified by eliminating the cash value standard, Raymond said.
The AALU believes that the PERC amount–which stands for premiums, earnings and reasonable charges–should be the safe harbor standard, regardless of cash value.
Elimination of the cash value standard would simplify the determination of fair market value, Raymond said. The cash value would not have to be determined, and all contracts could use the safe harbor, whether or not the cash value exceeded the PERC amount, he said.