The valuation of a universal or whole life insurance policy is needed for at least the following reasons:
- An asset acquired via the purchase of a company.
- A transfer of this asset, such as to a charity.
- A liquidation of the policy via a third-party sale.
- To support the value for IRS purposes.
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, we calculate the net present value of the future cash flows, less the costs to liquidate, that would accrue to the beneficiary. The net present value of the cash flows represents what a purchaser of the future cash flow streams would pay 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.
The maximum policy value is the higher of the present value of cash flows or the present value of the death benefit. The rate of return should correspond to a return expected from the insurance company. The actuarial tables for life expectancy are a key component of the analysis. Unique to The Mentor Group is that we employ a probabilistic modeling of each year's cash flow, meaning that each year we re-calculate based on the remaining expected life. This approach is the only one accepted by the IRS.