The Fair Market Valuation (FMV) of a life insurance policy is a calculation that is preformed to determine the current value of an insurance policy. GBL will provide an actuarial certificate which confirmed the policy’s FMV.
Below is an outline of situations in which you may require an FMV calculation, and which policies are likely to have a value. GBL also preforms FMV caluclations of critical illness policies, more information can be found here.
How is the FMV calculated?
The FMV calculation takes into consideration the current factors of the policy, including the insured’s current age and health, as well as future premiums due and coverage provided. The cash value (CV) of a policy does not always represent the true value of the policy.
Typically for permanent insurance products, the FMV will exceed the CV. The FMV may exceed the CV due to the following:
An FMV of a life insurance is recommended in the following situations:
If the transfer of a life insurance policy is made from a corporation to any person who does not deal at arm’s length with the corporation, subsection 148(7) of the Income Tax Act states that the proceeds of the disposition and the new ACB will be the greatest of the following:
On transfer, the individual is subject to a taxable benefit equal to the amount by which the policy’s FMV exceeds its CSV or the consideration paid by the individual pursuant to 15(1) of the Income Tax Act. Therefore even if the policy is transferred with no consideration, or at a consideration equal to the CSV, an FMV is still required to appropriately account for the taxable benefit.
Therefore, on transfer of ownership from a corporation to a non-arm’s length individual, an FMV of the life insurance is required in order to ensure the proper amounts are used for taxation purposes.
Example: Transfer from a corporation to a shareholder
Insurance Amount: $1,000,000
CSV: $150,000
ACB: $100,000
FMV: $400,000
A corporation owns a life insurance policy on a shareholder. When this shareholder leaves, the corporation no longer needs insurance coverage on the shareholder, however the shareholder wishes to own the policy personally. The corporation can therefore transfer the ownership of the policy to the departing shareholder.
Here are the potential tax impacts under the following scenarios:
Under scenario 1:
Under scenario 2:
Under scenario 3:
Note: The example above was for illustration purposes only, GBL does not provide tax advice.
Other tax planning strategies can be considered to manage or mitigate tax; speak with your tax specialist for more information.
Similar to transfers from a corporation to a non-arm’s length individual, transfers between corporations are subject to the same rules.
If the transfer of a life insurance policy is made between corporations that do not deal at arm’s length, such as an operating company to a holding company, or between sister companies, subsection 148(7) of the Income Tax Act states that the proceeds of the disposition and the new ACB will be the greatest of the following:
On transfer, the corporation which obtains the policy is subject to a taxable benefit equal to the amount by which the policy’s FMV exceeds its CSV or the consideration paid by the corporation pursuant to 15(1) of the Income Tax Act. Therefore even if the policy is transferred with no consideration, or at a consideration equal to the CSV, an FMV is still required to appropriately account for the taxable benefit.
Therefore, on transfer of ownership from a corporation to a non-arm’s corporation, an FMV of the life insurance is required in order to ensure the proper amounts are used for taxation purposes.
Over the course of your life, you may no longer need the life insurance coverage you once did. Often times in these situations, the individual will let the policy lapse or not re-new (if it is a term policy). But there may be another option.
A strategy being used increasingly often is to have the life insurance policy valued based on its FMV and transferring the ownership to a charity. The donor would receive a tax receipt equal to the FMV of the policy.
Example: Donation of a Life Insurance Policy
Joe Smith is a 60 year old teacher, who has recently been diagnosed with type 2 diabetes. He has a $1,000,000 convertible term 10 insurance coming up for renewal and is not looking to renew or convert it due to the spike in costs and the fact that he recently paid off his mortgage and his kids have completed University. He also has a close personal attachment to a local Children’s Hospital that took care of his daughter when she was born prematurely.
Joe speaks with his Financial Advisor about the best course of action and his advisor suggests having the policy valued to gift to the Hospital. Due to his age and health condition, the actuary was able to value the policy at $100,000. In this case, Joe was able to get a significant tax receipt and paid it forward to the charity he wanted to give back to.
On marriage breakdown, a determination of the value of all marital property is required. If the couples own life insurance policies, having an FMV prepared is the only way to ensure the appropriate value is assigned to these policies on separation of assets.
If a business owns life insurance for their owner(s) or key employees, the value of the policy should be considered when determining the overall value of the assets held by the business. An FMV is the only way to ensure the appropriate value is being assigned to the policies.
