For those looking to monetize their assets and supplement their income in retirement, life settlements can provide attractive tax benefits such as tax-free portions of settlement funds and, under certain conditions, complete tax exemption. To fully understand the tax policy under each component of a life settlement payout, it is often helpful to divide the sale proceeds and their tax implications into the three following categories.
- Tax Basis. Policyholders can enjoy any funds tax-free that are received through a life settlement and are equal or less than the sum of all paid premiums (this sum is referred to as the tax basis).
- Cash Surrender Value. When the proceeds exceed the tax basis, any difference between the policy’s cash surrender value and tax basis is taxed as ordinary income.
- Remaining Proceeds. Any sale proceeds that are beyond the policy’s cash surrender value are taxed as capital gains.
While the above tax rules hold in most cases, there are two instances in which all of the proceeds from selling your life insurance policy would be completely exempt from any taxation: when the insured individual is either terminally or chronically ill A person is considered terminally ill when a physician certifies that their illness or condition has limited their life expectancy to within 24 months.
An individual with a chronic illness is defined as someone who a licensed healthcare practitioner has certified as unable to perform two or more activities of daily living (ADLs) unassisted. Examples of ADLs that certify chronic illnesses are eating, walking, bathing, and dressing. When individuals meet the criteria for either of the above conditions, their life insurance sales are called viatical settlements, and all of the funds from the sales are free of taxes.
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Retire like a genius. Life Settlements are a financial alternative for seniors considering abandoning a life insurance policy after years of making premium payments. Life Settlements can unlock hidden value from an unneeded or unwanted policy. Any type of life insurance policy can qualify including term life and Universal Life policies. A life settlement can help a policy owner fund retirement and long-term care costs in four different ways. Life Settlements can be used to help your clients receive a lump sum payment for their policy instead of abandoning it. It can be exchanged for a reduced death benefit policy with no more premium payments. It can be used to help them pay for the expensive costs of long-term care in assisted living home care memory care or skilled nursing and it can be used to fund an annuity set up to guarantee them a monthly income for the rest of their life. There are no costs or obligations for a policy owner to evaluate their policy and then do a life settlement so never abandon a policy without first looking into the life settlement option. Retire like a genius
Disclaimer: Retirement Genius does not offer tax or legal advice. This material has been prepared for informational purposes only and should not be relied upon for tax or legal advice. Retirement Genius urges you to consult with your own tax or legal advisors before entering into any transaction.
