Why can a life insurance policy be worth more than its cash surrender value?
Key takeaway
A life insurance policy can be worth more than its cash surrender value because cash surrender value may differ from fair market value or the policy's full economic value. For owners of businesses, real estate, and private investments, the difference can matter when a policy is sold, distributed from a qualified plan, or gifted. Policy type and transaction context affect which value is reported.
A sale or distribution can involve fair market value
A policy sold or distributed from a qualified plan may have a fair market value above its cash surrender value. Practitioners describe that difference as a source of adverse audit results. Practitioners also say a policy transferred from a qualified plan must be sold for fair market value, which may exceed cash surrender value.
Some universal life values can move differently
No-lapse universal life policies can have a shrinking or disappearing cash surrender value while interpolated terminal reserve grows. Estate planning practitioners describe those values as measures that do not track each other.
Gift reporting can use economic value
Federal Form 709 instructions state that for a single-premium or paid-up policy whose surrender value exceeds replacement cost, the full economic value goes on Schedule A, not only the Form 712 figure. Connecticut gift tax instructions require federal Form 712 for a gifted life insurance policy. For single-premium or paid-up policies whose surrender value exceeds replacement cost, those instructions require reporting true economic value.
Form 712 figures can vary across carriers
Practitioners describe Form 712 interpolated terminal reserve values that differ substantially across carriers for otherwise identical universal life products. Another practitioner article describes a secondary-market valuation that put a policy's present value above its cash surrender value and gave advisers information for discussing options.