Your Questions. Answered.  |
 |
Contact | |
About Us |
 Eligible seniors can sell their life insurance policy for typically between two to four times what a life insurance provider would pay on a secondary market. Click here to discover if Life Settlements are right for you today! |
|
|
Quick Links
What are Life Settlements? Am I eligible? What Options Do I Have? Is It Right For Me? Why Should I Consider It? How Much Can I Make? Are There Tax Issues? What Is The Process? What Should I Prepare? What Should I Look For? How Do I Start? Where Can I Learn More? Latest Blog Entries
Your Life Settlement Questions. Answered. How To Squeeze Cash Out Of Thin Air During The Credit… Value for Creditors? The Hidden Potential in Life… The Stranger Among Us - Betting on strangers' life… Glossary of Life Settlement Terms, Part 2 Glossary of Life Settlement Terms, Part 1 Life Settlements: Their Creation and History The CSF System Promises to Revolutionize the Life… The new tool all financial and estate planners are… Finding the True Cash Value in Your Insurance Policy… Online Marketplace for Life Settlement Transactions… In The Press: New Web Portal Launches to Reach Consumers… In The Press: LiveSettlements.net Delivers Independent… Identify your risks, increase your rate of return. Deciphering the Life Settlement Process Death and Taxes? You can be certain! Alternatives? What other choices do I have? Baby boomers! Can't wait for that perfect vacation?… Exceeding Expectations. Enjoy the perfect retirement.… Pressured by your premiums? Sell your life insurance… Important tool for insurance agents: Life Settlements… Prosper on the secondary market: A new solution for… Selling yourself short? The other side of Life Settlements.… Kudos! Selling your insurance policy is a walk in… Senior citizens! New business model focusing on on… How to cheat death, or at least make a buck out of… The viatical fraud, how modern medicine changed everything… Sudden change in health? New solution to help pay… Win-Win situation? Who's the big loser? (Part 4 of… Lawmakers take notice: NAIC revises Life Settlement… SOLI - Stranger Owned Life Insurance (Part 5 of 11)… Does this suit you? (Part 6 of 11) Terrified by unscrupulous agents? Focus on insurable… Illegal rebating. Guard against malpractice (Part… Who ends up owning your life? (Part 9 of 11) Too good to be true? The hated tax issue. (Part 10… Free money for the wealthy. Liquidity for the underpriviledged.… Examples of how a Life Settlement can help you
|
Home > View Blog Post
Death and Taxes? You can be certain!
Saturday March 01, 2008 12:00AM | Click here to visit original article.
A Discussion of the Taxation of Life Settlements Introduction With the growing popularity of the selling of life insurance policies for life settlements, policyholders are benefiting from settlements two to four times greater than their surrender value. Term policy owners, especially, are benefiting from selling their policies, once deemed to have no value upon surrender. These policy holders are enjoying their life settlements in a variety of ways including: • Paying off debts • Provide oneself with quality medical care • Adding diversification to their investment portfolio • Taking dream vacations • Fund a family member’s education or provide gifts to family As with all things in life, some things are too good to be true, especially in the eyes of the IRS. Life settlements are subject to taxation, both from ordinary income tax and from long-term capital gains. Below is a summary of how life settlements are taxed for individuals. When charitable giving, estate tax planning, or business planning is involved, the rules become complicated. It is critical that a discussion is had with a tax expert before selling a policy. Taxation of Life Settlements First, let’s review what a life settlement is. A life settlement is the selling of an existing insurance policy to a third party. This third party is someone other than the insurer who originally issued the policy. Normally with an insurance policy that pays a death benefit, the beneficiaries receive the monetary benefit tax-free. With a life settlement, the policy is sold and the policy owner receives a benefit while still alive, thereby possibly triggering a taxable event. The taxation of life settlements occurs when the life settlement value of the policy is greater than the premiums paid on the policy. When this occurs, the proceeds will be taxed in three levels. Please note that when the premiums paid into a policy exceed the life settlement, this is treated as a capital loss. Tax Level 1 Cost Basis: the total premiums paid into the policy. This portion is tax-free. The Internal Revenue Code (IRC) regards this as a return of capital. Tax Level 2 Ordinary Income: the portion exceeding total premiums paid into the policy (your cost basis), but not exceeding the cash surrender value (the cash value the insurer of the policy will pay the insured when the policy is surrendered). The Internal Revenue Code (IRC) regards this as income, and as such is taxed as ordinary income. Tax Level 3 Long-Term Capital Gains: the portion exceeding the cash surrender value. This portion is taxed as long-term capital gains. The Internal Revenue Code (IRC) regards this as the disposition of a capital asset. Tax Scenarios Let’s look at a couple of scenarios to better understand what portion of the settlement is taxed. The first will feature a policy that will only realize capital gains. The second will feature a policy that will realize both capital gains and ordinary income. Scenario 1 James has paid $50,000 in premiums to his life insurance policy. His cash surrender value is $15,000 and he is selling his policy to a life settlement and will receive $200,000. George is realizing $150,000 in capital gains. $200,000 - $50,000 = $150,000 taxable as capital gains Scenario 2 Veronica has paid $45,000 in premiums to her life insurance policy. Her cash surrender value is $50,000 and she is selling her policy to a life settlement and will receive $200,000. In this scenario, $5,000 is taxable to Veronica as ordinary income and $150,000 is taxable as capital gains. $50,000 - $45,000 = $5,000 taxable as ordinary income $200,000 - $50,000 = $150,000 taxable as capital gains Tax Controversy There has been some controversy on how the tax situation is treated when the surrender value of the policy is less than the premiums paid into the contract. The IRS may take the position that only the portion up to the lesser cash surrender value is tax-free and the rest will be taxed as long-term capital gains. This is an example of why it is vital to discuss your personal situation with a tax expert. Tax Exceptions for the Terminally Ill There may be tax exceptions on the taxation of life settlements when the settlements are received by an insured who is chronically or terminally ill. The income tax exception only applies if specific requirements are met. The settlement funds must be used specifically for covering costs for qualified long term care not already covered by other insurance providers. The income tax exclusion also applies when payments are made to the chronically ill on a periodic basis, though there are annual limits for this. Again, it is important that you discuss your personal situation with a tax expert. If you decide to pursue a life settlement, expert advice is critical. This article has attempted to provide accurate and general information about the taxation of life settlements but it cannot be relied upon as fact. Tax situations are constantly changing and there can be some disagreement on how certain scenarios are taxed. State laws may also have specific ways of treating life settlements. In general, the taxation is favorable because of the ability to tax most, if not all, of the benefit as long-term capital gains instead of ordinary income. The ability to receive a tax-free amount, especially in policies that have low or no cash surrender value, is an important thing to consider when discussing the option of a life settlement. |
Recent Settlements
68 Year Old Male$200,000 Convertible Term Life $0 Surrender Value Paid: $40,500
65 Year Old Female$15,000,000 Universal Life $332,270 Surrender Value Paid: $1,078,000
73 Year Old Male$1,000,000 Universal Life $3,500 Surrender Value Paid: $52,183 ADVERTISEMENT
Latest News
Luminex Corporation and Mingyuan Medicare Development Company Sign ... - MarketWatch 20 November 2008, 9:22 am Landmark Medical Fights for Life as Hospital Shutdowns Swell - Bloomberg 20 November 2008, 6:38 am LPHI Announces Cash Dividend - MarketWatch 20 November 2008, 6:35 am Medicare enrollment aggravates, baffles aged - Arizona Daily Star 19 November 2008, 10:01 pm Catalyst Sees Investors Turn To Senior Life Settlements - MarketWatch 19 November 2008, 5:28 am Welcome Funds Announces Its Life Settlement Continuing Education ... - Business Wire (press release) 18 November 2008, 5:34 am Life settlements: how much?! - Investors Chronicle 17 November 2008, 5:54 am Enrollment starts today for Medicare drug plans - Tulsa World 15 November 2008, 12:49 am Life Settlement Industry Vows Renewed Effort to Promote Effective ... - MarketWatch 13 November 2008, 7:00 am Advanced Settlements Offers A New Funding Option - MarketWatch 3 November 2008, 7:34 am |
| Copyright © 2008 LiveSettlements.net. All Rights Reserved. | Company Directory | Contact Us | Privacy Policy | Site Map | Glossary | Life Settlements Glossary | Life Insurance Glossary |