Fair market value of life insurance question
September 14, 2018 10:39 AM   Subscribe

I've read that the fair market value of life insurance must be calculated for "business valuation, estate planning and business succession". What exactly does "business valuation, estate planning and business succession" mean? I guess I'm wondering if someone can explain like I'm five what these circumstances mean and why the calculation is needed in these cases? Also, I'm not sure if it matters or not, but in case it does, I'm located in Canada. Thanks!
posted by Proginoskes to Grab Bag (1 answer total) 1 user marked this as a favorite
If you own a life insurance policy and the insured person dies, you get some cash. Therefore a life insurance policy has a value like a stock, bond, or other IOU; someone else might be willing to buy it from you to have a chance to collect the cash. Why do we care what this value is?

1. If the policy is owned by a company then it is an asset of the company just like inventory or a building. In order to value a company, it helps to know what its assets are worth. One reason a company might own such a policy is to insure the life of the CEO so losing that person's leadership would be less of a disaster.

2. If the policy is owned by someone who can leave it to heirs, then it is part of their estate. If you are in someone's will and also own a life insurance policy on them, then when they die you will receive the insurance payout in addition to your other inheritance. In either case, planning what to do when someone dies (estate planning) should take the value of the insurance into account to respect people's intentions.

3. If a number of people own a business jointly, and one of them dies, the others often have the right to buy the dead person's share and keep control of the business. To be sure to have enough money to do this, they will often insure each other's lives. Setting this up so that the value of the insurance is adequate is part of succession planning.
posted by drdanger at 11:22 AM on September 14, 2018 [3 favorites]

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