Revenue Procedure 152-84 for Valuing Life Insurance
Understand the IRS methodology for valuing a gifted life insurance policy, a crucial step for ensuring accurate gift tax reporting and compliance.
When an individual transfers ownership of a life insurance policy for less than its full value, the transaction is considered a gift for tax purposes. The Internal Revenue Service (IRS) provides specific guidelines for determining the value of this gift. This valuation is not based on the policy’s cash surrender value or its face amount, but on a specific calculation method. The value determined through this process is the amount that must be reported to the IRS for federal gift tax purposes.
Determining When the Procedure Applies
The specific valuation method for gifted life insurance policies applies when a policy that has been in force for some time, and on which future premium payments are still due, is transferred to another party. This approach is for ongoing contracts that have not yet matured or become fully paid-up.
This method contrasts with the valuation rules for other types of life insurance gifts. If a person purchases a new life insurance policy and immediately gifts it, the value of the gift is the cost of the policy. If the gifted policy is a single-premium contract or a policy that is already fully paid-up, its value is what the insurance company would charge for a comparable single-premium contract on the date of the gift.
The procedure is specifically designed for this intermediate scenario. If the policy is not newly issued and not paid-up, this method is the default standard under Treasury Regulation §25.2512. It is intended to capture the economic benefit being transferred, which lies somewhere between the initial cost and the final death benefit.
Required Information and Documentation for Valuation
To properly value a life insurance policy, the donor must obtain specific information from the insurance company on Form 712, Life Insurance Statement. The donor must formally request it from the insurer, who completes it and certifies the information as accurate. A separate Form 712 is required for each policy being gifted.
The most important piece of information on Form 712 is the “interpolated terminal reserve” (ITR). The terminal reserve is an amount the insurance company is required to set aside to cover its future obligations under the policy. Since a gift rarely occurs on the exact policy anniversary, the ITR is a pro-rated calculation that estimates the reserve value on the specific date of the gift.
Another figure provided on Form 712 is the value of any “unearned premiums.” This represents the portion of the last premium payment that covers the period of insurance protection extending beyond the gift date. This unearned amount is added to the policy’s value.
Finally, Form 712 will disclose the amount of any outstanding loans against the policy. A policy loan reduces the value of the gift because the new owner receives the policy subject to this debt. Obtaining a completed Form 712 is the foundational step for the valuation calculation.
Calculating the Value of the Gift
Once the completed Form 712 has been received, calculating the value of the life insurance gift follows a specific formula. This formula uses the figures provided by the insurer to determine the policy’s value for gift tax purposes.
The formula is: (Interpolated Terminal Reserve + Unearned Premiums) – Outstanding Policy Loans = Gift Value. The first step is to add the interpolated terminal reserve (ITR) to the amount of any unearned premiums. The final step is to subtract the balance of any loans secured by the policy.
For example, suppose an individual gifts a policy on June 30th. They receive a Form 712 from their insurer with the following information: the ITR is $52,000, the unearned premium is $1,500, and there is an outstanding policy loan of $5,000. Using these figures, the value is calculated by first adding the ITR and the unearned premium ($52,000 + $1,500 = $53,500). From this subtotal, the loan balance is subtracted ($53,500 – $5,000), resulting in a final gift value of $48,500.
Reporting the Life Insurance Gift
After calculating the value of the gifted life insurance policy, the donor must report the transfer to the IRS. This is done by filing Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. The value of the policy, as determined by the valuation formula, is the amount reported on this return.
Filing Form 709 is required if the value of the gifted policy, combined with other gifts to the same individual during the year, exceeds the annual gift tax exclusion. For 2025, this amount is $19,000 per recipient. A Form 709 must be filed even if no tax is due because of the donor’s lifetime exemption. The return is generally due by April 15th of the year following the gift.
When reporting a life insurance gift, a copy of the completed Form 712 must be attached to the Form 709. The IRS requires this documentation as proof of the policy’s valuation. The Form 712, certified by an officer of the insurance company, substantiates the figures used in the calculation, such as the interpolated terminal reserve and unearned premiums.