Tax Information
The following is for informational purposes only:
Taxation of Life Settlement proceeds may vary state by state and each case can be treated
differently by the IRS.
It is recommended that you consult your tax advisor and financial planner prior to
selling any life insurance policy.
Listed below are a few basic concepts that need to be understood regarding life insurance
policies to fully understand the tax consequences of a settlement.
Basic concepts regarding life insurance policies
Cash Surrender Value (CSV) – This is the value a policy can be surrendered to the
insurance company for. Quite simply it is the liquid assets inside the life insurance policy
minus any outstanding policy loans.
Cost Basis – This is the total dollar amount paid into the life insurance policy including premiums and lump sum amounts.
Settlement Offer – This is the amount of cash before taxes a settlement company is
willing to pay to assume ownership of the policy.
Potential tax implications of a Life Settlement
Capital Gains Tax =Settlement Amount received - Cost Basis
If the CSV is lower than the cost basis, then the taxable income would be the difference between the settlement amount minus the cost basis of the policy. That amount would be taxed as a capital gain.
Ordinary Income Tax =Cash Surrender Value - Cost Basis
If the CSV exceeds the cost basis, then the difference is considered as ordinary income and would be taxed at the policy owner’s tax bracket. The difference between the settlement proceeds and the CSV would be considered a capital gain and taxed accordingly.
Capital Gains Tax =Settlement Amount – Received Cash Surrender Value
If the cost basis of the policy is higher than the settlement amount, no taxable income from the transaction is generated.
Other Issues to Consider
A Life Settlement could affect your eligibility for public assistance programs. Settlement payments may also be taxable and subject to claims by your creditors. Life Settlements will also affect the threshold of insurability available on the insured and assistance should be sought from a financial advisor before pursuing and completing this transaction.
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