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Success Stories: Policy Appraisal Brings Confidence to Planning

November 24th, 2020 No comments

Recently I was brought a situation by a family office through their attorney.  The family wants to transfer/sell two $10,000,000 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 w

ere the same death benefit on the same couple issued at the same time for the same kind of policy, the numbers came back very, very different from the two insurance carriers, each of which is one of the top rated and recognized carriers in the market.

The cash value of each policy was roughly $1,500,000 and one carrier came back with a number exactly the same as the cash value and even stated on their communication “Please note that ABC Life uses the Net Cash Value as a proxy for the ITR.”  However, the other carrier came back with a $3,000,000 number.

I’ve been involved in situations where the policy owner wants a number as high as possible and in others they are shooting for a low number.  In this case they wanted to play fair and have a “real” number but not any higher than necessary.  What makes things a bit difficult is that the traditional rules and historic rulings for policy valuations per t

he IRS were from a time where insurance was very different and the secondary market didn’t exist.  Also, I’ve seen insurance companies come back with objectively ridiculous numbers, like a value equal to the death benefit.

The situation I’m discussing today is proof that different insurance companies are taking 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.

While reasonable people will disagree about how this applies to life insurance, “Fair Market Value” 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 a policy such as the one’s noted above, which are on two insured individuals in their sixties with no health issues (there is no value in the life settlement market), there is 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 $3,000,000 is meaningless.  If they had $2,500,000 or $3,500,000 as a reserve amount would that change the fair market value of the policy?  Of course not.  Then why pay attention to that number?  It’s really quite silly.

This is where 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 legitimate rationale.

Though I’m not an accredited appraiser I am familiar with many appraisers around the country and know what they specialize in and which one to bring in for a given situation.  For example, you don’t use 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.  There’s no reason to pay top dollar for some purposes and you certainly don’t want to cheap out for others.

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.

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Comparing Term Life Insurance Policies

November 18th, 2020 No comments

Though the following piece I wrote on term insurance with Professor Gregg Dimkoff may seem very basic, sometimes it’s the basics that bear reviewing so we don’t miss something while focusing on the “high end” stuff.  In numerous recent situations clients have suffered significant harm because the basics weren’t a focus.  Also, the market is changing and we can’t take for granted our old assumptions are still accurate.  Enjoy.

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