Life Settlement Taxation: What You Should Know

Are you thinking about a Life Settlement, and have questions about whether the proceeds are taxable? Are you wondering about taxation of Life Settlements for policyholders and investors? Read on for an overview of how your Life Settlement proceeds may be taxed and other considerations to keep in mind if you're thinking about a Life Settlement.

There is not a "life settlement tax" per se, but the proceeds of your Life Settlement may be tax free or they may be subject to federal, state and local tax laws. How they are taxed - as capital gains or ordinary income - may depend on several factors such as how much you have paid in premiums.

(Note that Viatical Settlement taxation is a different matter. if you are selling a Viatical Settlement, which generally refers to a transaction with a policyholder who is terminally ill, the proceeds may be considered exempt from tax.)

How Much of Your Life Insurance Settlement is Taxable?

So is a Life Insurance Settlement taxable? The tax implications will depend on how much you sell your policy for, what the surrender value is and what your basis, or cost, is.

If you sell your Life Insurance for a Life Settlement, you can deduct the basis, or the actual cost of your policy, from the proceeds of Life Settlement to determine what portion is taxable. Let's say your policy has a death benefit of $250,000, a cash surrender value of $50,000, and you've paid $40,000 worth of premiums, of which $20,000 was the cost of insurance. You sell the policy through a Life Settlement for $100,000. The cost basis is $20,000, so you deduct $20,000 from $100,000, leaving $80,000. The cash surrender value is $50,000, so $50,000 is taxed as ordinary income and $30,000 (the difference between $80,000 and $50,000) is taxed as capital gains.

Keep in mind this is intended to be a general explanation. You should always talk to a tax professional about possible taxes on a life insurance settlement or other related issues.

How IMS Settlements Can Help

If you are considering selling a Life Insurance policy for cash, contact IMS Settlements. We have a well-established, extensive network of Life Settlement providers that purchase these policies and are able to help you maximize the value of your existing policy. We've been working with financial professionals and Life Insurance policy owners for years. For a free evaluation of your policy and more about how we can help you, contact us today.

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  • Work with an experienced viatical settlement broker
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