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Are Life Settlement Proceeds Taxable? What Policyowners Should Know
By Saul L. Appel, CLU®, ChFC®
Life settlement proceeds may be partly taxable. The answer depends on the policyowner’s tax basis, the policy’s cash surrender value, the sale price, ownership structure, and current tax law.
In general, a portion of the proceeds may represent a return of premiums paid, while another portion may be treated as taxable gain. Depending on the facts, taxable amounts may include ordinary income and capital gain components. Policies owned by trusts or businesses can create additional considerations.
The insurance carrier can usually provide premium and cash-value information, but it does not give personal tax advice. Before accepting an offer, the policyowner should ask a qualified tax professional to review the proposed transaction. The adviser may need the total premiums paid, outstanding loans, cash surrender value, cost basis, and expected settlement proceeds.
Taxes should be evaluated before closing, not after the money has been distributed. A good life settlement decision compares the net proceeds after taxes with the alternatives: keeping the policy, reducing coverage, borrowing from it, surrendering it, or allowing it to lapse.
This article is educational and is not tax advice. Tax rules can change, and every case is different. Consult a CPA or tax attorney regarding your circumstances.
For a confidential policy-value review, visit Policy-Cash.com.
Saul L. Appel, CLU®, ChFC® | President, Appel Financial, Inc. | 50+ years experience