Tax Implications
One of the most common questions asked about Life Settlements is "What are the tax implications?"
Typically, any amount the policy owner receives for a policy in excess of the cash surrender value is treated as a capital gain.
This graph illustrates how the proceeds from a sale would be taxed on a policy with a total value of $1 million, a cash surrender value of $90,000, and cumulative premiums of $70,000. When considering this or any other financial planning option, clients are advised to consult their tax advisor.
Most life settlements are considered taxable.
Tax Free Portion (cost basis) - The proceeds of the settlement up to the cost basis (the premiums that one has paid into the policy).
Tax As Ordinary Income (CSV) - The amount of the settlement that is between cost basis and the policy cash surrender value. The policy’s cash surrender value is the amount the client would receive if they were to surrender their policy back to the insurance carrier from which it was purchased.
Capital Gains - For the portion of the settlement that is over and beyond the policy's cash surrender value.
