What is the taxation implication of a Life Settlement?
The sale of a life insurance policy may be a taxable event and experts disagree on the details of taxation, but the general consensus is the proceeds will be taxed as follows • IRC § 72(e)(6) – amounts paid in less amounts received (i.e. dividends) = cost basis and the portion of the Life Settlement up to the basis will be received tax free. • The difference between premiums paid and up to the cash surrender value will be taxed as ordinary income. • The portion exceeding the cash surrender value will be a gain, which, in some circumstances, may be a capital gain. • IRC § 1221 – Life Insurance is capital asset Tax obligations will vary with the sale of an insurance policy. Melville Capital does not make any representations as to the tax treatment of a sale of a life insurance policy. Melville Capital strongly encourages the Seller to consult with their tax advisor, attorney, or financial planner as it related to their specific situation.
