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IRS Issues Life Contract Valuation Guidance

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The Internal Revenue Service has responded to industry questions by spelling out rules for valuing life insurance policies held within qualified retirement plans.[@@]

The IRS released earlier guidance on the issue in February 2004. Life insurance experts at the American Council of Life Insurers, Washington, and other organizations raised questions regarding some of the safe harbor provisions in the 2004 guidance.

The new guidance seems to answer many of those questions, according to Mark Canter, an ACLI senior counsel.

The new guidance seems to “address a number of the issues we raised,” Canter says. However, he says the ACLI is still analyzing the new guidance.

The new guidance provides a formula for determining the fair market value of life insurance policies held within qualified plans.

That formula, as outlined in the new guidance, consists of premiums paid plus interest, dividends or other credits minus “reasonable mortality and other reasonable charges actually charged,” by the date of distribution or transfer that are expected to be paid.

For variable contracts, the guidance establishes fair market value as cash value without reduction for surrender charges provided that cash value is at least equal to the total premiums paid plus all adjustments made to those premiums reflecting investment return and the value of segregated asset accounts, minus reasonable mortality and other charges actually charged by the date of determination.

Although the new guidance answers many questions, some issues, such as those involving the treatment of surrender charges, remain, Canter says.

The guidance does, however, state that the formulas it suggests should never be used to understate the fair market value of an insurance contract.

The IRS says in the guidance that taxpayers can rely on the safe harbors the IRS established for distributions, sales or other transfers taking place after Feb. 13, 2004, and before May 1, 2005.

Going forward, because the guidance was put out as a “revenue procedure” rather than a proposed rule, the process for seeking further changes is more open, Canter says.

“I expect to the extent that we can identify any further issues and communicate them to the IRS quickly, they can be addressed,” Canter says.

The IRS has posted the guidance at //


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