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A Wilmington Tax Accountant Discusses Life Settlements

A Wilmington NC CPA and tax accountant discuss life settlements and IRS Rev Ruling 2009-13

Life Settlements: a Wilmington NC tax accountant says to consider all the factors carefully

A life settlement is cash paid to an owner of a life insurance policy while the insured is still alive. Obviously for less than the face value of the policy, but more than the cash value.  Often in a scenario where the policy would otherwise be surrendered or allowed to lapse. 

“While a life settlement does provide cash now, new IRS rulings have increased taxes on the proceeds.  Due diligence dictates weighing all the factors, and alternatives, carefully.”
Gary Bode, CPA 
Wilmington NC Tax Accountant

The Life Settlement Industry

Like any financial transaction, the life settlement company is out to make a profit.  A lot of profit. The industry developed a predatory reputation secondary to being largely unregulated, and the elderly nature of the clientele. Underlying industry capital evaporated in the recession. Some say the industry is now only about half as what it was, in dollars, prior to 2008: 16 Billion to 8 Billion.  But with over a Trillion, yes a Trillion, dollars of life insurance being surrendered or lapsing annually, combined with high potential profit and the graying of America, the life settlement industry will probably regain ground.

Sound Choice?

Perhaps. But taxes have to be factored in to reach net cash value of any lifetime settlement. And the alternative scenario of the effect of the full policy value on the estate of the insured should be considered, if there is enough current cash in the family to wait.

Before Rev. Ruling 2009-13

When a policy is surrendered, the owner’s taxable profit is ordinary income equaling the cash value received less the premiums paid.  Very straight forward.  Life Settlements essentially split the deal into two taxable components: ordinary income, the same as the surrender scenario, plus capital gains on the life settlement amount less the cash surrender amount.

After Rev. Ruling 2009-13

An adjustment for the hypothetical value of the insurance coverage while it was in force is now required.



Cash Life Settlement:  Surrender Value ($100,000) – Premiums Paid ($92,000) = Taxable Income ($8,000).

Old Life Settlement, pre Rev Ruling 2009-13

There are two life settlement components. The first is ordinary income, thesame as the surrender scenario above.  Cash Surrender Value ($100,000) – Premiums Paid ($92,000) = Taxable Income ($8,000). Plus Capital Gains on the Life Settlement payment ($110,000) less the Cash Surrender Value ($100,000).  Total: $18,000 in taxable interest.

New Life Settlement per Rev Ruling 2009-13

A hypothetical value of the worth of insurance coverage, which I’m estimating at $5,000 for this example, raises the ordinary income to $13,000.  The Capital Gains component stays the same at $10,000.  For taxable income of $23,000. The government often tries to dictate social policy through taxation.  As a Wilmington NC CPA and tax accountant, I wonder if the IRS deliberately dissuading life settlements?

For a free initial consult on this or any accounting or taxation issue, please call us at (910) 399-2705.

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