119 / How are life insurance policies and endowment contracts valued for gift tax purposes?

Generally, the value of a gift of life insurance is established through the sale by the company of comparable contracts.¹

If a new policy is purchased for another, or is transferred as a gift immediately after purchase, its gift value is the gross premium paid by the donor to the insurance company.²

If a person makes a gift of a previously purchased policy, and the policy is single-premium or paid-up, its gift value is the single premium that the company would charge currently for a comparable contract of equal face value on the life of a person who is the insured’s age at the time of the gift.³ A 1978 ruling concerned a single premium life policy in force for 20 years where the replacement cost of a single premium life policy of the same face value on the same insured was substantially less than the cash surrender value of the existing policy. The IRS ruled that the replacement contract would not be “comparable” and that in the absence of information pertaining to a “comparable contract” the value of the policy would be determined by reference to the interpolated terminal reserve value.⁴

If the gift is of a policy on which further premiums are payable, the value is established by adding the “interpolated terminal reserve” (the reserve adjusted to the date of the gift) and the value of the unearned portion of the last premium.⁵

Example. A gift is made four months after the last premium due date of an ordinary life insurance policy issued nine years and four months before the gift was made by the insured, who was 35 years of age at date of issue. The gross annual premium is $2,811. The computation is as follows:

Terminal reserve at end of tenth year	$14,601.00
Terminal reserve at end of ninth year	$12,965.00
Increase	$1,636.00
One-third of such increase (the gift having been made four months following the last preceding premium due date) is	$545.33
Terminal reserve at end of ninth year	$12,965.00
Interpolated terminal reserve at date of gift	$13,510.33
Two-thirds of gross premium ($2,811)	$1,874.00
Value of gift	$15,384.33

The amount of a policy loan outstanding at the time of the gift would be subtracted.⁶

The effect of the circumstance that the insured is uninsurable at the time of the gift is uncertain; there is no case directly on point.⁷

See Q 116 regarding gifts with respect to split-dollar arrangements.

If the gift of the policy or contract is conditioned upon payment of the gift tax by the donee, the value of the gift is reduced by the amount of the gift tax paid by the donee.⁸

A group term life policy assigned by an employee to an irrevocable trust on the day before a monthly premium was due was held to have no ascertainable value for gift tax purposes, but it was also held that after the assignment the employee would be deemed to have made a gift to the assignee whenever the employer paid a premium.⁹ A 1984 revenue ruling valued the gift as follows: If the plan of group term insurance is nondiscriminatory or the employee is not a key employee, the Table I rates may be used. If the employee chooses not to use Table I, or if the plan is discriminatory and the employee is a key employee, the employee should use the actual cost allocable to the employee’s insurance by obtaining the necessary information from the employer. The rates apply to the full face amount of the insurance.¹⁰ Projecting the holding of the 1984 ruling to the nondiscrimination rules applicable to taxable years ending after October 22, 1986 ( Q 249), it would seem that if the plan of group term insurance is discriminatory with respect to the employee, the employee must use the higher of Table I rates or actual cost.