Tax Issues
*The following is provided for informational purposes only.
Savvy Financial Group, Inc. is does NOT:
- Hold a C.P.A. license
- Hold a J.D. Degree in Tax Law
- Is not qualified to give legal tax advice
Having given all the mandatory legal disclaimers above, take a look at some of the tax implications below. It could help you decide to take a closer look at life insurance settlements or drop the whole idea right now...
Glossary
Case Surrender Value = How much a life insurance policy is worth if the owner told the insurance company they didn't want it anymore and that they wanted whatever value it has in it. This assumes it was a cash value policy; as non-cash value policies like term life insurance have zero cash value under normal circumstances.
CSV= An acronym for Cash Surrender Value (see above).
Cost Basis = Total dollar amount of premiums paid into the policy
Settlement Amount = Purchase price paid to policy owner/seller for the sale of the policy
- If there is no CSV or if the CSV is lower than the cost basis in the policy, then the taxable income is the dollar difference between the settlement amount minus the cost basis of the policy. That amount is treated as a capital gain.
Capital Gains Tax = Settlement Amount - Cost Basis
- If the CSV is higher than the cost basis, then that difference is treated as ordinary income and taxed according to the policy owners tax bracket. Then the difference between the settlement amount and the CSV is treated as a capital gain.
Ordinary Income Tax = CSV - Cost Basis
Capital Gains Tax = Settlement Amount - CSV
If the cost basis in the policy is actually higher than the settlement amount, then there should not be any taxable income from the transaction.
- If the settlement amount is less than the cost basis, there is (most likely) no taxable income.
No Taxable Income = Settlement Amount - Cost Basis = ( - ) Negative Value or (Loss)
Please remember that these are general guidelines and cannot be relied upon as fact. The tax implications of a settlement should be considered prior to the transaction.
We strongly recommend that a policy owner seek professional tax advice prior to accepting any offers.
Additional Effects
*Receipt of payment under a life settlement may affect your eligibility for public assistance programs, such as:
- Medical assistance (Medicaid)
- Aid to Families with Dependent Children
- Supplementary Social Security Income
- AIDS drug assistance programs
I also may be taxable and subject to claims of your creditors. Before applying for a life settlement, you should consult with the appropriate social services agency concerning how receipt could affect your eligibility and that of your spouse or dependents; and because of the potential tax consequences, please consult with a tax advisor.
Entering into a life settlement contract may cause other rights or benefits such as disability waiver of premium benefits that may exist to be forfeited by the owner; assistance should be sought from a financial advisor before pursuing and completing this transaction.