What is the Fair Market Value of your
Life Insurance Policy?

Life insurance policies are purchased in order to provide a sense of security for the future. However, needing access to cash, wanting to benefit from the equity on a policy, or when faced with life-threatening illnesses, many people make the decision to sell their policy.

• Gaining access to a lump sum cash payment that an individual can spend according to their wishes.
• Ceasing of life insurance premium payments
• Not needing to pay the money back as would be the case if a person borrowed against their life insurance policy
• In some cases, the money received is tax-free and there is a potential that a person could receive more than the current cash value of the policy.

Factors That Affect Market Value

The general considerations in valuing a policy are:

• The details of the life insurance policy, such as the death benefit, premiums, cash surrender value and the policy features and options.
• The pertinent details about the insured including age, sex, and health.
• The investment environment including current interest rates and taxation issues where relevant.
  

It is possible for a life insurance policy to have a fair market value that is larger than its cash surrender value. This typically occurs due to the degree of impairment of the health of the insured or because of external factors like low interest rate levels causing cash surrender values to be low. Life insurance policies are more likely to have fair market value in excess of their cash surrender value where the life insured has impaired health, however due to the proliferation of low or zero cash surrender value on policies, it can also occur when the life insured is in good health.

The Uses of Fair Market Value

Some potential uses for obtaining the fair market value of a life insurance policy are:

Sale to Another Party or Surrendering a Policy
To sell to an Arm’s Length or Non-Arm’s Length Party, a market valuation of an insurance policy can provide a policy holder with the following:

• Comparing fair market value to cash surrender value
• Conducting corporate transactions at fair market value
• Valuing “in kind” payments to shareholders and employees
• Providing fair market value for Estate freeze
  
• Assisting with the transfer of a corporation owning life insurance policies
• Taxation of non-residents selling or gifting their policies

Estates
To equitably distribute property or determine taxable income, it is sometimes necessary for estates to obtain market value estimates of life insurance policies.

• An insurance valuation can provide a policy holder with the following:
  
• Appraising individuals/corporations owning life insurance including the management of continuing policies to aid in the fair distribution of property
• Determining Capital Gains Tax and Deductions in the case of corporate owned life insurance insuring arm’s length person or non-shareholder
• Appraising the fair market value of life insurance for Buy-Sell Agreements
  
• Assessing the value of family property on spousal death
  

Equalization on Spousal Death or Divorce
In the event of spousal death or marriage breakdown the value of property is to be determined to ensure the equal distribution of family property. Life insurance policies need to have their fair market value assessed to ensure the equitable division.

A fair market valuation can assist in the Equalization process by:

• Valuing spouses life insurance policies in the case of marriage breakdown.
• Appraising the value of a policy of a deceased spouse or of a continuing life insurance policy.
• Determining the value of a corporation that owns life insurance policies in order to ensure an equitable distribution of property
  

Charitable Gift
It is possible for a policy holder to donate a life insurance policy to a charity while the owner of the policy is still living. This entitles a donor to a donation receipt for the fair market value of the policy, as well as any premiums on that policy that a donor continues to make. A policy owner may choose to donate a life insurance policy before the death of the life insured for the following reasons:

• Ability to utilize the tax deduction while living
• Greater certainty that a particular charity will receive the benefit
• The ceasing of premium payments
• Gaining value from low or zero cash surrender value policies
  

An alternative is for a policy owner to donate the death benefit of the life insured to a charity by direct designation or by having the death benefit paid to their estate and giving it to a charity by will.

A fair market valuation can assist in the donation of a policy by:

• Assessing the amount for a donation receipt
• Managing donated life insurance policies
• Determining amount for cash back from donated life insurance policies
  

Immigrating and Emigrating
When an individual becomes or ceases to be a resident of Canada, the Income Tax Act requires certain property to be disposed of. This can include life insurance policies which have been deemed disposed at either cash surrender value or fair market value. There are situations, however, where some life insurance policies are granted an exclusion.

An insurance valuation can assist by:

• Assessing value of a non-Canadian policy upon becoming a resident of Canada
• Determining value and potential proceeds of a non-Canadian policy upon ceasing to be resident of Canada
  

Tax Planning
A fair market valuation can be of invaluable benefit to an individual or a business owner in the tax planning process. There are many uses for an assessment including:

• Determining potential sale of policy between shareholders and corporations
• Assessing or implementing estate freeze for a corporation that owns life insurance policies
• Evaluating the impact of insuring non-owners on small business capital gains exemption
• When donating a policy to charity, determining whether to gift or direct designate.