As a result, the accuracy of a life expectancy estimate is essential. Some settlement recipients may need to make estimated tax payments if they expect their tax to be $1,000 or more after Viatical settlements are considered an advance of your death benefit and are therein tax free. This article provides a basic primer on the U.S. income taxation of life settlements from the perspective of both the original policyholder who sells a life insurance policy in a life settlement transaction and the investor who purchases a life insurance policy, either from its original policyholder or from another secondary life insurance market owner of the policy. Myth #2: Viatical Settlements are Always Tax-Free. A little tax planning, especially before you settle, goes a long way. Magna Life Settlements Staff . 1040, Schedule 1, even if the punitive damages were received in a settlement for personal physical injuries or physical sickness. Before investing in a life settlement, investors may wish to keep the following points in mind. Magna pays people cash for their life insurance policy from the convenience of their own home online. If the insured dies before his or her estimated life expectancy, the investor may … Life Settlement: The selling of one's life insurance policy to a third party for a one time cash payment. Today, the profit of your life settlement is defined as the difference between the premiums you paid and the cash payout you received from the sale. As discussed above, viatical settlements must meet specific requirements in order to be tax-free. Any remaining amount is subject to capital gains tax. With these so-called life settlements, investors buy your policy at a discount and, as the beneficiaries, cash in when you die. The new tax law contains another boost for life settlements in the form of an increase in the amount excludable from estate taxation. For the sale of a life insurance policy to be considered a tax exempt viatical settlement, you need to have a life expectancy that is under 2 years. It is possible for chronically ill patients with life expectancies over two years to receive tax-free viatical settlements.

Investors purchased approximately $2.5 billion in life insurance face value in 2017, representing an increase in life settlement activity for the second consecutive year. The Tax Cuts and Jobs Act of 2017 (TCJA) simplified life settlement taxation substantially. The Lawsuits, Awards, and Settlements Audit Techniques Guide provides more detailed information about the specific tax treatment of a settlement or award. Considerations for investors in life settlements. The purchasers of life settlements, sometimes called life settlement companies or life settlement providers, generally are institutions that either hold the policies to maturity and collect the net death benefits or resell policies—or sell interests in multiple, bundled policies—to hedge funds or other investors. Life settlement taxation works in three tiers.

The taxation for a life settlement transaction is complicated and varies based on the type of life insurance contract that is sold (term vs. cash value life insurance). The amount paid into the policy (the tax basis) is tax-free. Punitive damages are taxable and should be reported as “Other Income” on line 21 of Form . IRS Publication 4345 provides additional basic information about the taxation of settlements, judgments, and awards. The market for policies dipped after the recession. Our team has decades of financial experience, and are dedicated to helping those in need.

The return on a life settlement depends on the insured’s life expectancy and the date of the insured’s death. It's even more important now with higher taxes on lawsuit settlements under the recently passed tax reform law. Internal Revenue Service rulings treat the income made by life settlement investors after receiving the contract’s death benefit as ordinary income, rather than capital gains. Allison Bell, Allison Bell | February 23, 2018 The new tax flow could help, but higher cost of insurance charges could hurt. Magna Life Settlements is the leading life settlement provider. These two IRS rulings focus both on the taxation of the investors and on the taxation of insureds who transfer life insurance policies. Viatical Taxation vs. Life Settlement Taxation. While this ruling makes filing taxes simpler for the recipient of life settlement income, the gains are taxed at a higher rate than most investment vehicles.

Proceeds greater than the tax basis, but less than the cash surrender value, are taxed at ordinary income rates.