The sale of a life insurance policy may be a taxable event.

On May 1, 2009, the IRS issued Revenue Ruling 2009-13*, which defines an individual policy owner’s tax liability on the proceeds from the sale of a life insurance policy in a life settlement transaction.

Upon the sale of a cash value life insurance policy:

• The recognized gain is the difference between the net amount to client and the policy owner’s adjusted basis.
• The adjusted basis is determined by subtracting the cost of insurance from the total premiums paid. This amount is received tax free as a return of cost basis.
• Any recognized gain greater than the adjusted basis and less than the policy's cash surrender value will be taxed as ordinary income.
• Any recognized gain above the policy's cash surrender value will be taxed as a capital gain.

In the sale of a term policy:

• The premiums paid and the cost of insurance are both assumed to be equal, which means the adjusted basis will always be $0.
• Any recognized gain will be taxed as a capital gain.

A policy owner contemplating selling their life insurance policy should always seek advice and counsel from a qualified professional tax advisor.

Neither Invescor nor any of its financial professionals provide any tax advice.

*Revenue Ruling 2009-13 focuses on individually owned policies, using the cash method of accounting, in which the insured was not terminally or chronically ill. The ruling can be found in its entirety at http://www.irs.gov/pub/irs-drop/rr-09-13.pdf.

Financial Considerations

Life settlements are not for everyone. There are many factors to consider such as a continued need for coverage and whether there are plans to replace an existing policy with another policy. Carefully consider such factors as the availability, adequacy, and cost of comparable coverage. Also assess the circumstances, including financial need, investment objectives, tax considerations, and other relevant implications of selling a policy. Life settlement proceeds may be subject to creditor claims.

A life settlement transaction may affect your client’s eligibility for state or federal government programs, such as Medicaid, the Supplemental Nutrition Assistance Program (food stamps), or other programs.