Life Insurance Policy - An Overlooked Asset


Life insurance policies are assets, whether owned by an individual, a trust or a corporation. And the death benefits are usually not taxable.

These are many reasons today to develop the value of a policy, some of which are:

  • Life settlements
  • Sale of a business – individual or company ownership
  • Transfers from benefit plans to another owner form
  • Collateral for loans

Our firm performs many policy valuations. The new standard is Fair Market Value, not cash value. The primary impetus for this norm is found in Internal Revenue Procedure 2005-25.

Insurance policies/contracts are illiquid, non-traded assets typically designed to provide benefits for the insured or for the beneficiaries of the insured. Unlike traded securities (such as most stocks and bonds), there is no readily available reference source to assist in establishing an insurance contract fair market value.

The right to receive cash flow distributions represents the most significant economic benefit due to the beneficiaries of the life insurance contract. In valuing this right, The Mentor Group, Inc. calculates the net present value of the future cash flows that would accrue to the beneficiary. The net present value of the cash flows represents what a purchaser of the future cash flows streams would pay for the cash flows on the date of the value, after taking into consideration the specific facts and circumstances of the life insurance contract. It reflects the theoretical cash distribution that would be received by a beneficiary from withdrawal, loans and death benefit cash flows.

While the value of liquidation rights is important to investors and should be considered in the valuation of any life insurance contract, the fair market value is best calculated through discounting the expected future cash flows to present value, because liquidation of the insurance policy is neither imminent nor certain.