Insurance Policy Valuation
Life Insurance
Oxburgh Row values two types of life insurance policies for gift/estate or income tax purposes. The two kinds of Life Insurance Assignments are as follows.
Life Insurance Policies
The life insurance policy provides two benefits: (1) the death benefit and (2) the cash surrender value. These are mutually exclusive benefits. If the heirs collect the death benefit they can no longer surrender the policy. Likewise, if the policy is surrendered then heirs cannot collect a death benefit; therefore, the valuation requires an actuarial calculation using mortality factors.
The fair market value of the policy cannot be less than the cash surrender value because a policy owner is free to surrender the policy right away and collect cash from the insurance company; therefore, the cash surrender value is the floor value.
Collateral Assignment Split Dollar Receivables
The Sponsor enters into a split dollar insurance agreement with the Trust. The terms of the Agreement create a receivable that is due to the Sponsor from the Trust which is equal to the greater (or lesser) of the cash surrender value of the Policy or the amount of premiums paid. This receivable is called the Collateral Assignment Split Dollar Receivable (CASDR).
The receivable is due when the Insured dies or the Agreement is terminated; however, the Sponsor is not able to unilaterally surrender the policy, so the liquidity is triggered by the death of the insured. Therefore, there is no minimum value here (as opposed to the valuation of life insurance policies). The fair market value of the CASDR is much lower than the Cash Surrender Value.
The valuation requires an actuarial calculation using mortality factors. This lowers the valuation since the insured typically has a 40 year life expectancy. The risks of the Collateral Assignment Split Dollar Receivable are high and can be compared to Viatical Settlements or Life Settlements. Therefore, the fair market value of the CASDR is greatly reduced. This is a great vehicle for the sponsor to lower the estate by gifting more during natural life.