1. Sally and Mary are sisters. Sally owns a life insurance policy on Mary and ha
ID: 2781690 • Letter: 1
Question
1. Sally and Mary are sisters. Sally owns a life insurance policy on Mary and has named Mary's only child Tom as the beneficiary. Sally transfers the policy to Tom on January 1st of this year. The policy terminal reserve is $25,000 on July 1st of last year and $30,000 on July 1st of this year. If Sally paid the full $3,000 annual premium on July 1st of this year, the value of the policy for gift tax purposes is ___________. Calculate the interpolated terminal reserve below.
with solution pls.
Explanation / Answer
ANSWER:
When someone receives a policy or when someone dies and owns a life insurance policy on another person's life, it is necessary to know the value of that policy for gift tax purposes. The value is NOT the cash value, but the cost of replacement.
Here, replacement cost is the cost of buying another similar policy from the same insurer. If the policy has been in force for some time and there are future premiums to be paid, the value may be approximated by adding the interpolated terminal reserve to the unapplied premiums.
In our current question, considering future premium of $3000 (already paid); we would left with policy terminal reserve of $30,000 as on july 1st of this year. Hence, value of the policy for gift tax purpose is $ 30,000.
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