The sale of a life insurance policy may be a taxable event. Tax experts disagree on the details of taxation, but there is a general consensus that if the cash surrender value of the policy exceeds the premiums paid on it, the life settlement proceeds will be taxed as follows:
- The portion up to the policy owner’s investment (premiums paid) in the contract will be received tax-free
- The difference between premiums paid and up to the cash surrender value will be taxed as ordinary income
- The portion exceeding the cash surrender value will be a gain, which, in some circumstances, may be a capital gain
Where the cash surrender value of the policy is less than the investment in the contract, the IRS may take the position that only the cash surrender value represents a tax-free return of basis, and everything else is gain on the sale of the asset. This is not a universally accepted view, so professional advice on any particular situation should be sought.
Financial Consequences
An owner contemplating selling his or her life insurance policy should always seek advice and counsel from a professional tax advisor.
A life selltement transaction may affect your eligibility for state and/or federal government programs such as Medicaid and Food Stamps or other programs. Advice should be sought from the appropriate agencies. Also the proceeds may be subject to creditor claims.
Neither Invescor, Ltd. nor any of its financial professionals* provides any tax advice
Viatical and other policy options may offer tax-favored options. Clients who are chronically or terminally ill may be eligible for a viatical settlement, and as such, may be able to receive those benefits on a tax-free basis.
Terminal illness is defined as a person having a life expectancy of less than 24 months. Clients should consult their insurer or tax advisor regarding their specific circumstances.
* Financial professionals include: life insurance agents/brokers, life settlement agents, registered representatives, financial planners,
financial advisors, etc.
