Wednesday, August 20, 2008

Tax Implications of Life Settlement Funding

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.

Tax illustration

10 Year Old, $1 Million Face-Valued Policy

$300,000 Settlement Price

$210,000 Taxes as Capital Gain (difference between Settlement Price and Cash Surrender Value)

$90,000 Cash Surrender Value (basis and earnings)

$20,000 Taxed as Ordinary Income (difference between Cash Surrender Value and Tax Bais)

$70,000 Tax Basis (premium paid)

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.

ILSA was formed to meet the changing demands of trusted advisors and their clientele, who are increasingly taking advantage of the booming secondary market for life insurance. The market is burgeoning as clients become aware of the $108 billion* of existing policies that have unrealized potential in excess of their cash surrender values. ILSA maximizes these gains for our clients, who are quickly becoming more sophisticated and knowledgeable of these opportunities. Our website is For any questions you might have please feel free to contact Institutional Life Settlement Advisors at 877-438-4572.

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