Tax Implications of Life Settlement Funding

By Jonathan Proby

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 http://www.ilsallc.com/. For any questions you might have please feel free to contact Institutional Life Settlement Advisors at 877-438-4572.

Jonathan H. Proby, CSA, MBA is a South Florida native having been born and raised in Coral Gables, Florida. He is the son of the late Judge Lucien C. Proby (U.F. Hall of Fame) and mother Kathryn, a prominent publisher. Jonathan is the author of "The Seven Most Costly Financial Mistakes Made By Seniors", "The Ten Most Essential Things That You Must Know When Selling Your Insurance Policy", and "Life Insurance Settlements and the NASD... A Study in Compliance", is the past host of the Southern Most Wall Street Report on Conch FM and has authored other literary and columnist works.

Jonathan frequently provides lectures and workshops for approved continuing education to professionals such as CPAs, (CPE) Attorneys, (CLE) Financial Planners (CFP) and Insurance Agents (CE). Jonathan has provided lectures on advanced wealth management and estate planning strategies including "Life Settlements, Premium Financing, Charitable Giving, Premium Financed Life Insurance and The Insurance Audit". Through his lectures, Jonathan has introduced and taught these strategies to notables including the Florida Bar, the Society of Financial Service Professionals, The Financial Planning Association, The Florida Institute of CPAs, the National Association of Estate Planners and Councils with distinguished honors of the "NAEPC Speakers Bureau" and at Georgetown School of Law.

Jonathan is a NASD General Securities Representative. He received his Bachelor degree from Florida State University and earned his MBA in 2003. Jonathan is a Certified Senior Advisor (CSA) member and fully certified CE instructor of the Financial Planning Association (FPA), the Florida Institute of Certified Public Accountants (FICPA), the American Bankers Association (ABA), the National Association of Estate Planning Councils (NAEPC), The Society of Financial Service Professionals (SFSP), and the Planned Giving Council of Miami Dade County. He began his career as a Financial Consultant over a decade ago with Nationsbank/Dean Witter.
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