IRS Issues Guidance On Valuation Of Life Insurance In Qualified Plans

The guidance provides a formula for determining fair market value

The Internal Revenue Service has issued additional guidance for the valuation of life contracts in qualified plans to clarify some questions raised by the industry regarding earlier guidance.

The IRS initially had put out its guidance on the issue in February of last year, but the American Council of Life Insurers and others raised questions regarding some of the safe harbor provisions. The recently issued guidance, according to ACLI senior counsel Mark Canter, seems to answer many of those questions.

“Initially it does address a number of the issues we raised,” he said. However, he added, the ACLI is “still working through” some of the complexities of the guidance.

The new guidance, Canter said, provides a formula for determining the fair market value. 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.

Canter noted that although the new guidance answered many questions, some issues, such as those involving the treatment of surrender charges, remain. The guidance does, however, state that the formulas it suggests should never be used to understate the fair market value of an insurance contract.