Fair Market Value Transfer of Life Insurance

Continuing Education for Financial Service Professionals

Fair Market Value Transfer of Life Insurance

Contributors: Daniel Kahan, ASA and Jeff Cait, MBA, CFP, CLU, CH.F.C.

Fair Market Value Transfer of Life Insurance Copyright 2013 Centre for Life Insurance and Financial Education All rights reserved. Any reproduction of parts or all of this book and its contents by any means electronic or mechanical is prohibited.

& The Fair Market Value Transfer of Life Insurance is relevant to all those who work in the financial services industry or in association with life insurers. The information in the course is provided for educational purposes only; it should not be construed or interpreted as providing advice. Agents and advisors should always seek guidance from their principals and compliance experts in regards to informing themselves and others about details of the products they sell and other considerations of their business.

& Many thanks to Daniel Kahan, ASA and Jeff Cait for their expert input, review, and suggestions.

We welcome all feedback and suggestions for additions to the course. Please send your comments to info@clifece.ca.

CLIFE INC. 1595 Sixteenth Avenue Suite 301 Richmond Hill, ON L4B 3N9 www.clifece.ca The Fair Market Value Transfer of Life Insurance provides continuing education credits for life agents and CFPs upon satisfactory completion of an online test. Please see the website for details or email info@clifece.ca.

Terms Defined

Adjusted cost basis (ACB): An insurance term that describes the cost of a policy to its owner (primarily represents the amount of premiums paid.)

Assignment: The process by which policy ownership is transferred. An assignment can be absolute (permanent) or collateral (temporary and used to securitize a loan).

Attained age: The current age of a person.

Capital Dividend Account (CDA): A notional account of a corporation used by private corporations to pass through specific non-taxable receipts to its corporate shareowners.

Cash surrender value: The cash value paid to a policy owner in exchange for surrender of a life insurance policy.

Cash value: Value that accumulates in some life insurance policies as a result of premium payments that may be used to fund non-forfeiture benefits.

Disclosure: Revealing information to relevant stake-holders.

Disposition: The process by which the interest in a life insurance policy is transferred to another party, including by assignment.

Fair market value (FMV): The definition provided by the Canada Revenue Agency is the highest price, expressed in terms of money or money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed, and prudent parties acting at arm’s length, neither party being under any compulsion to transact.

Fiduciary duty: The duty obligating one person to act in the best interests of another in respect of property or money.

Policy Loan: A feature available in policies with cash values that permits the policyowner to borrow up to 90% of the cash surrender value of the policy.

Net cost of pure insurance: A charge in a life insurance policy that represents the cost of providing the death benefit to the beneficiary.

Fair Market Value

A life insurance policy is deemed to have a fair market value due to premiums that have been paid on the policy, the number of years the policy has been issued, and the value of the policy benefit.

Many circumstances can lead to the need to value a life insurance policy. They include: -

when the ownership of a policy will be transferred and the buyer, seller, and Canada Revenue Agency will all have an interest its fair market value;

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when the marriage between a policy owner and his or her spouse ends and a value must be attributed to the policy as a family asset;

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as part of the valuation of a business in which the policy owner is the business.

Most valuations are done for the purpose of transferring ownership. The most common transfers are: -

between an individual and a closely-held corporation;

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from an operating company to a holding company;

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from the policy owner to a charity;

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from the policy owner to an investment fund1

It is estimated that between 1,500-2,500 FMV assessments are performed in Canada each year; that number is increasing.

This course will focus on the transfer and valuation of a life insurance policy between an individual and a closely-held corporation. Other policies may also have fair market value, such as a critical illness insurance policy or disability income insurance policy; they are beyond the scope of this course.

1

Fair Market Value of Life Insurance Policies, Research Paper, Canadian Institute of Actuaries, September 2013.

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