Life seldom works out as you plan. You may have gone to college in Boston to become a lawyer and wound up running a restaurant in San Francisco. You may have thought you would never get married, but now are living in the suburbs with a family of four. If you bought a life insurance policy somewhere along the way, that policy may be worth a great deal of money today as an insurance settlement.
Life Settlement Providers
A life settlement provider may be able to help you convert your policy to cash. Life settlement providers are companies, or sometimes individuals, who operate in the secondary market for insurance. You should not confuse them with life insurance companies. They are in the business of aggregating and buying policies and do not have any fiduciary relationship with their clients.
In order to be able to sell your policy to a life settlement provider, and get the money you need, your policy must be attractive enough for the provider to want to make you an offer. When you qualify for a life settlement and decide to sell your policy, you are giving up ownership in the policy. In exchange for a lump sum payment, the life settlements provider becomes the sole beneficiary of the policy.
While the guidelines may be slightly different based on which life settlement provider you select, it is a fair statement to say that in order to qualify, you must have a major slippage in health which results in a fairly dramatic reduction of your life expectancy. It is not necessary for you to be terminally ill to qualify for a life settlement. Use the life settlement calculator to estimate the value of your life insurance policy as a life settlement or viatical.
Backgrounds and Life Insurance Settlement Providers
A life settlement provider will want to know some things about you and your life insurance policy. First of all, because your health is a major factor in determining the potential value of your policy, the provider may want to review all of your medical records, get reports from doctors and consult actuarial charts to determine your life expectancy. Second, the provider will want to know the amount of your death benefit and if there are any loans against the policy. Your policy needs to be valued before an offer can be made.
A person may have a number of different reasons for wanting to sell their policy. Assuming you meet the conditions to qualify for a life settlement, you may want to make a deal because you have high out of pocket medical costs due to your declining health. The money you receive could be applied to pay for home health care to help you with your basic needs such as bathing or preparing meals.
You can also use the proceeds from a life settlement to take a trip across the country to visit family before your condition deteriorates to the point where you can no longer travel. If you are 95 but still spry, you will likely qualify for a life settlement and then you can use the money to try to do everything on your bucket list.
When life circumstances change, having a life insurance policy can be a real blessing. Why not get your policy valued and see if a life settlement provider can help you?
Are There Any Taxes Associated with Life Insurance Settlements?
People investigating the opportunity offered by a life insurance settlement want to sell their insurance policy so they can monetize it. Some believe that since the investment vehicle is a life insurance policy it is exempt from taxes. This belief stems from beneficiaries of life insurance that a relative named as a beneficiary on the policy does not pay taxes on the payment from the insurance company.
Life Settlement Sales are Taxable
The rules are different though when a company or individual owns a life insurance policy through a life insurance settlement. In 2009, The United States Internal Revenue Service issued rules on when the proceeds of a life settlement are taxable.
Thanks to the 2009 issuance of rules, life insurance settlements for federal income tax purposes are the same across the country. However, each state, at the state level, handles taxation differently. For this reason, it is important that you arrange a conference with a qualified tax advisor to find out the state tax implications of selling your life insurance policy.
Content presented here is for information only and no one should rely on it or make a decision based on it. Life Settlement sales are complicated financial transactions. Seek the advice of a qualified life settlement tax advisor or your own finance advisor before concluding a sale.
History
The ability to enter in a life settlement agreement has been legal for over 100 years. It was almost a well-guarded secret, as insurance companies would rather pay the insured the cash surrender value of his or her life insurance policy rather than the full face value to an owner not related to the insured. This is a financial decision by the companies. By being silent about life settlements, they encouraged people to either abandon their policies or cash it in for face value only. This is good for an insurance company’s bottom line.
However, during the 1980s, viatical settlements started to become popular. While a viatical settlement is very similar to a life settlement, the sales were from young, terminally ill patients who usually needed the money for health care and end of life care. As the viatical market matured so did the life settlement industry.
Since life settlement transactions were rare, the Internal Revenue Service had no written policies on how to tax them. This lack of direction from the IRS continued for nearly a decade, until May of 2009 when the IRS issued IRS revenue ruling 2009-13 – life settlement taxation guidelines.
IRS Ruling 2009-13
There are two buckets of cash that interest the IRS when a sale of a life settlement occurs. First are capital gains. Second is ordinary income.
Ordinary Income Taxes
The ordinary income portion of the transaction is the cash surrender value of a life insurance policy – it is what the seller receives when surrendering the policy.
Capital Gains Taxes
The amount a seller receives from the life settlement broker less the surrender value is a capital gain under most circumstances. Even if it is a capital gain, the tax rate is usually lower than if treated as ordinary income.
Term Policies
Settlement proceeds up to the total premiums paid beyond the cost of insurance (COI) required to keep the policy in force is the basis. That amount tax-free. Monies paid out over the basis are a capital gain and taxed.
Universal Life Insurance and Whole Life Insurance Policies
These classes of policies have more complicated tax requirements. According to the 209 ruling calculating the basis is the same for these policies as it is for term policies. Settlements up to the amount of the cash surrender value (CSV) less premium payments great than cost of insurance is ordinary income and taxed as such.
Finally, life settlement proceeds that exceed the CSV are capital gains and taxed as such. For Universal Life and Whole Life policies, the taxation is more complex. The revenue ruling says that settlement proceeds up to the total premiums paid over and above the cost of insurance (COI) needed to keep the policy in force is considered basis and is tax free (same as a term policy). Settlement proceeds up to the cash surrender value (CSV) minus premium payments exceeding COI is ordinary and subject to ordinary income tax. Lastly, settlement proceeds above the CSV are capital gain and taxed using the capital gain formula.
Although when you sell your policy for cash, it is not as if you have gotten a tax free life insurance loan. There are tax implications.
The federal government has one set of rules for life insurance settlement taxes that work all over the United States, each state handles life settlement taxation differently. The federal rules need to be followed carefully, as do each state’s regulations making it a good idea to hire an expert in life settlement taxation to advise you.
Why the life settlement industry may be your best source for cash?
Thanks in large part to the tremendous advances in medicine, people are living a lot longer today than they did back 50 or 100 years ago. According to the National Center for Health Statistics, a man born in 1930 had a life expectancy of 58.1 years and a woman born in 1930 could expect to live for 61.6 years. Men born in 1950 could be expected to live until age 65.6 and women to 71.1. In 2010, the expected life span of a man born in that year stood at 76.2 and, for a woman, at 81.1.
When you were younger and purchased a life insurance policy, you did so for a specific reason. Now that you are older, your circumstance are almost certainly different. Today, you may decide that you no longer have the need to maintain your life insurance coverage. It might be to your benefit to turn your policy into a lump sum of cash. Finding a provider in the life settlement industry can be your best option when you make the decision to relinquish ownership of your life insurance policy.
Deciding on Selling Your Life Insurance Policy for Cash
If you decide to relinquish ownership of your policy, there are several different approaches you might take. The least attractive of your options is to simply stop paying your premiums and let your policy lapse. When you do that, you may be giving up any value that has built up after years of paying your premiums. A second alternative is to take the cash surrender value of your policy. While better than letting your policy lapse, this option may not return much of the real value that is in your life insurance policy. That leads the third, and quite likely, the best option – a life settlement. You may even be able to sell your expiring term insurance for cash.
The life settlement industry is a relatively new industry that developed as a way of helping millions of people obtain more money from their life insurance policies than they could get by going directly to their insurance companies. When you qualify for a life settlement, you generally get well above the surrender value and somewhere less than the face value of your policy.
Life Settlement Industry History
Back in the early 1980’s, when the AIDS epidemic was taking many lives, patients were able to receive accelerated death benefits from their life insurance provider. Viatical settlements became available to policy owners who were terminally ill and had a life expectancy of less than 24 months. As medical knowledge and treatment of AIDS patients improved, so too did the life expectancy of these patients. While many of these patients still needed to access money from their insurance, they were not categorized as being terminal and could not qualify for a viatical settlement. Out of this need, the life settlement industry began in the secondary market for insurance.
It always is a smart idea to review your insurance needs as your life circumstances change over time. Getting a life insurance settlement does require you to meet certain benchmarks, but many people do qualify. In order to see if you qualify and can take advantage of a more generous offer to buy your life insurance policy, you should have your policy valued. If you do qualify, you are under no obligation to accept a life settlement offer and are free to proceed as you wish.