Recently, the attorney for a family office asked for my help with a situation. The family wanted to transfer/sell two $10 million survivor life policies to another trust for planning purposes. The policy owner went to the two insurance carriers to ask for the 712 values or Interpolated Terminal Reserve (ITR). Though the two policies had the same death benefit on the same couple issued at the same time for the same kind of policy, the numbers came back very different from the two insurance carriers, each of which is one of the top rated and recognized carriers in the market.
A Difference of Opinion
The cash value of each policy was roughly $1.5 million, and one carrier came back with a number exactly the same as the cash value and even stated on its communication “Please note that ABC Life uses the Net Cash Value as a proxy for the ITR.” The other carrier came back with $3 million..
I’ve been involved in situations in which the policy owner wants a number as high as possible and others in which they’re shooting for a low number. In this case, they wanted to play straight and have a “real” number but not any higher than necessary. It can be a bit difficult to follow traditional rules and historic rulings for policy valuations per the Internal Revenue Service when those rulings were from a time when insurance policy types were limited and different than today and the secondary market didn’t exist. Also, I’ve seen insurance companies come back with objectively ridiculous numbers that have no basis in reality.
The situation I’m discussing today is proof that different insurance companies take different approaches so there isn’t an objectively “correct” way to do this. Clearly, the values of these two almost identical policies don’t vary by such a margin. This means we have to introduce some sanity into the situation.
Fair Market Value
While reasonable people will disagree about how this applies to life insurance, “fair market value” (FMV) is a relatively non-controversial term when it comes to many things commonly appraised. In my opinion, and the opinion of many I’ve consulted with, life insurance shouldn’t be any different. If we’re looking at policies such as the ones noted above, which are on two insured individuals in their 60s with no health issues (there’s no value for these policies in the life settlement market), there’s literally no entity on the face of the earth that would offer more than the cash surrender value in an arm’s length transaction. The fact that one carrier has a statutory reserve of $3 million is meaningless. If that carrier had come back with $2.5 million or $3.5 million as a reserve amount, would that change the FMV of the policy? Of course not. Then why pay attention to that number? It’s really quite silly.
This is when a formal appraisal comes in handy, and that’s what we did in this case. The appraisal brought some sanity to the process and provided a legitimate rationale.
Find the Right Appraiser
Life insurance appraisers specialize in appraisals for different purposes. For example, you wouldn’t be well served using the same appraiser for a charitable donation of a life insurance policy as you would for an appraisal that accompanies a 706 or 709 tax return, and both of those may be different than the appraiser you would use for a trust transfer among friendly parties who agree on numbers. There’s no reason to pay top dollar for some purposes, and you certainly don’t want to cheap out for others. I’ve helped coordinate the process and direct many clients to the most appropriate appraisers for their needs.
Paying for a policy appraisal has turned out to be one of the greater returns on investment I’ve seen in a number of situations.
Bill Boersma is a CLU, AEP and LIC and the founder and owner of OC Consulting Group. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info, www.XpertLifeInsAdvice.com or email at [email protected].