Just like the sale of other personal assets, the income generated from a life settlement transaction may be taxable. Life settlement transactions typically result in a capital gain. In rare circumstances, a portion of the settlement proceeds may be treated as ordinary income. This would only occur if the policy’s cash surrender value were greater than the total cost of premiums paid into the policy. However, it is also possible that there are no federal tax consequences if the settlement proceeds are less than or equal to the adjusted basis in the policy. For further clarification, please refer to the IRS Bulletin located online at http://www.irs.gov/irb/2009-21_IRB/ar06.html .

Additionally, any tax implications for capital gains realized from a life settlement transaction could be offset by tax deductions based on “the entire cost of maintenance in a nursing home or home for the aged” (sec. 1016 U.S. Master Tax Code 2008). In the case of a viatical settlement where the insured has a terminal diagnosis with a certified physician’s prognosis of 24 months or less, the proceeds may be tax-free at the federal level (see Health Insurance Portability and Accountability Act of 1996).

Global Life Settlements is not a tax advisor and strongly recommends that policy owners seek professional tax advice prior to accepting any life settlement offers.

https://www.irs.gov/irb/2009-21_IRB/ar06.html

  • Please note: Due to an IRS ruling in 2009 a settlement amount equal to the policy owner’s total premium payments (the cost basis) is generally 100 percent deductible. The difference between the cost basis and the cash surrender value of the policy is generally taxable as ordinary income. The proceeds received exceeding the cash surrender value are generally taxable as a capital gain. Of course, all tax questions should be directed to a tax advisor.