The interpolated terminal reserve is a mid policy year calculation on a life insurance policy's reserve used most often to determine the market value of a life insurance policy. The value of the interpolated terminal reserve is something close to the policy's cash value, but the two are not the same.
What is an interpolated terminal reserve value?
This worked fine for whole life (WL) and annual renewable term (ART) policies. For a WL policy, the reserve value at the next anniversary date is known in advance, so the terminal reserve value can be “interpolated” to reflect a valuation before the next anniversary date.
What is the interpolated terminal reserve (ITR) for life insurance?
Often times, when a life insurance policy needs to be transferred, an advisor—unaware that a fair market valuation is a viable option—will follow IRS safe harbor guidelines and request the policy’s value from the insurance company for reporting purposes. The insurance company typically provides the Interpolated Terminal Reserve (ITR).
What is terminal reserve in insurance?
Terminal Reserve. Definition - What does Terminal Reserve mean? A terminal reserve is the leftover reserve of a life insurance company at the end of the policy year. Comprising net premiums due and investment income, it is used to pay for death benefits, dividends, and other policy-related expenses.
What happens if you don’t keep a terminal reserve?
If a terminal reserve is not kept, then the insurer would have no way to satisfy claims that start coming in at the beginning of the new policy year. This could cause the company to become financially insolvent.
What is interpolated reserve value?
The insurance company typically provides the Interpolated Terminal Reserve (ITR). An ITR value is a value calculated from the policy's reserve value at a particular point in time.
How is interpolated terminal reserve value calculated?
The interpolated terminal reserve value is usually equal to or slightly larger than the cash value of the policy. The life insurance company must make this calculation for you, although the cash value is a good estimate. The company provides this value by completing IRS form 712.
What is terminal Reserve?
Definition of terminal reserve : the reserve for an insurance policy at the close of a year after net premiums for the year have been received and death claims paid.
What is terminal reserve balance?
What Does Terminal Reserve Mean? A terminal reserve is the leftover reserve of a life insurance company at the end of the policy year. Comprising net premiums due and investment income, it is used to pay for death benefits, dividends, and other policy-related expenses.
How do you determine the value of a life insurance policy?
The takeaway: Face value is different from cash value, which is the amount you receive when you surrender your policy, if you have a permanent type of life insurance. Face value is calculated by adding the death benefit with any rider benefits, and subtracting any loans you've taken on the policy.
What is PERC value in life insurance policy?
PERC stands for aggregate Premiums, plus Earnings, minus Reasonable Charges. For this calculation, the term aggregate premiums includes premiums that are paid by dividends, and dividends that are applied to purchase paid-up additions.
How do I get Form 712?
If you have a life insurance policy claim and need to obtain a copy of the IRS Federal Form 712, you can download a copy on the IRS website.
What are aggregate health policy reserves?
The aggregate reserve reflects the future liabilities arising under accident and health insurance policies. Policy reserves have traditionally been referred to as active life reserves and include unearned premium reserves.
How do you calculate deferred premium?
This special asset is termed “deferred premiums.” Deferred premiums are computed by taking the gross premium (or premiums) extending from (and including) the modal (monthly, quarterly, semiannual) premium due date or dates following the valuation date to the next policy anniversary date and subtracting any such ...
What is insurance premium loading?
According to insurers, loading is an additional cost built into the insurance policy to cover losses which are higher than anticipated for the company arising from insuring a person who is prone to a form of risk.
What is terminal reserve?
A terminal reserve is the leftover reserve of a life insurance company at the end of the policy year. Comprising net premiums due and investment income, it is used to pay for death benefits, dividends, and other policy-related expenses. At the beginning of the subsequent policy year, it becomes the initial reserve. Advertisement.
What happens if a terminal reserve is not kept?
If a terminal reserve is not kept, then the insurer would have no way to satisfy claims that start coming in at the beginning of the new policy year. This could cause the company to become financially insolvent.
What is terminal reserve?
A policy’s terminal reserve is the amount of money that the life insurance carrier has set aside by law to guarantee the payment of policy benefits and is determined once a year. The ITR is a mid-year estimate of the terminal reserve value determined by adding the current year’s increase to the prior year’s reserve.
What is ITR in life insurance?
The insurance company typically provides the Interpolated Terminal Reserve (ITR).
What is the statutory reserve method?
Every carrier is required to file financial statements with their state regulators using the “statutory reserve” method. Carriers use the so-called “AG 38 reserve” method for policies with a secondary no-lapse guarantee (for example, NLG UL).
Why is the AG 38 reserve higher than the tax or statutory reserve?
The AG 38 reserve method is generally higher than the tax or statutory reserve due to the long-term death benefit guarantee s. Sometimes carriers also use a minimum “deficiency reserve” in calculating the AG 38 reserve, which creates even larger reserve values. IRS Form 712.
What is ITR in insurance?
ITR is at the heart of the current dilemma on how to value policies. Insurance carriers are required to reserve assets to meet future contractual obligations. Whenever a policy must be valued on other than its anniversary date, the reserve value must be “approximated” (that is, interpolated).
Do carriers have reserve value?
Carriers create reserves for level term policies, so their value is often greater than the remaining unearned premium. Different Reserve Values. Further compounding the valuation conundrum is that carriers use different types of reserve value methods for a policy.
The Popularity of Pension Rescue
There has been a resurgence in the popularity of pension rescue. 3 Three developments have contributed to it:
No-Lapse Guarantee Universal Life Insurance
Stock market declines since the beginning of this century have made variable life insurance unattractive to many investors. In addition, low interest rates have decreased the appeal of traditional universal life insurance. Real estate values are down.
Basic Mechanics of Pension or IRA Rescue
As previously mentioned, in the pension rescue strategy, the client has a qualified profit sharing plan with a large balance in his or her account. The balance qualifies as seasoned money, 7 so all of it is available to buy life insurance.
Determining FMV
Life insurance policies are difficult to value. In Henry’s case, what might the FMV of the policy be 10 years after issue? Of course, Henry thinks it is the $700,000 cash surrender value.
What Is the Interpolated Terminal Reserve?
To define ITR, one must first define “terminal reserve” and “interpolated.”
Where Does That Leave the Client?
Henry was convinced that cash surrender value was FMV—after all, that is what it was worth to him. The insurance producer had been careful to explain that there was a lot of “gray” in determining FMV and that Henry might have to hire an appraiser to document the valuation as of the date of sale to the ILIT.
