When a life insurance policy changes hands, someone has to put a value on it, and the IRS cares a great deal about that number. Yet there is no single, simple rule for valuing an in-force policy. The good news for advisors: determining value isn’t your job, but you can make the process much easier.
Key takeaways
- Policy value matters whenever ownership changes: rollouts from a business, distributions from a qualified plan, gifts and sales.
- In most of these transfers, both parties benefit from a low value, which is exactly why the IRS scrutinizes them.
- Advisors shouldn’t render a value opinion; request the carrier’s Form 712 and related values and give them to the client’s CPA, attorney or appraiser.
It is not the insurance advisor’s responsibility to determine a policy’s value, nor should you try.
When policy valuation matters
Fair market value is generally the price a willing buyer and willing seller would agree on, neither under pressure and both knowing the relevant facts. Life insurance transfers rarely look like that. Common situations include:
- Business to employee: an employer rolls a key person policy out to a retiring executive. The employer may be glad to undervalue it so the employee reports less income.
- Qualified plan distributions: the plan trustee doesn’t care about the value, but the participant who must report it as income, possibly with a 10% early distribution penalty, prefers it low.
- Gifts: the donor is already in a giving mindset, so a lower value simply means a smaller taxable gift.
Because the parties’ interests often line up rather than conflict, the IRS takes a close look.
Why there’s no easy answer
Congress, the IRS and the courts haven’t produced one clear framework. Instead, taxpayers face a patchwork of rules that vary with the type of transfer, the type of policy and interpretation of the facts. Different contexts may point to different measures of value.
What advisors should do
Rendering a valuation opinion is outside an insurance advisor’s professional role. What you can do is request the carrier’s Form 712 or a similar valuation statement. You may receive several figures, such as:
- Interpolated terminal reserve (the most common)
- Accumulated cash value and cash surrender value
- PERC (premiums, earnings, reasonable charges) value
- Premiums paid
- Tax and statutory reserves
Pass these to the client’s attorney, CPA or qualified appraiser to support their valuation. That’s more help than most advisors provide. Our article on gifting strategies covers one situation where valuation often comes up.
Frequently asked questions
What is Form 712?
A life insurance statement issued by the carrier that reports policy values. It’s used for estate and gift tax returns and is often a starting point for valuing a policy that is transferred.
What is interpolated terminal reserve?
An actuarial reserve value, adjusted for the point in the policy year and unearned premium, commonly reported on Form 712 as one measure of a policy’s value.
Should the insurance agent determine the policy’s value?
No. Advisors should provide carrier-reported values and let the client’s tax professional or appraiser determine the value used for tax reporting.
Reviewed by Tim Fuller on 2026-09-26
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
Connect on LinkedIn →We’re Here to Help
Have a question about what you just read, or a case you’re working on? Tell us a bit about what you need, and a member of the SRS team will follow up with you personally — no obligation, no hassle.
