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Saturday, September 23, 2023

A Guide to Life Settlement Taxation


In the life insurance market, many customers usually come to a point where they have a crucial inquiry about life settlement taxation . Moreover, the answer is, yes, they are. Any concerns that you may have related to tax and your insurance settlement is best asked to a tax advisor.

There may have been instances where you heard stories on how people have sold their life insurance for cash returns; this may have given you an idea that leads you to think about natural ways to get cash from your insurance policy whenever you wanted, but that is not the case.

Truthfully, selling your life insurance is an option that is taken when you find yourself in a situation wherein you do not require the policy anymore. Even if you ever reach these situations, you need to know the process behind this option, the various circumstances where you can sell your insurance and the consequences of selling it.

When you decide to trade your insurance, you have to know that you won’t be able to pay for it once you sell, nor will you receive any reimbursements that the insurance provides once you pass away. This is where it’s essential that you do proper research before confirming your decision.

How does life settlement taxation work?

There are three tiers that are involved when you decide to sell your policy:

  1. The proceeds that you get right up to the total premium paid are free from the income tax.
  2. Proceeds that you get are more than the tax amount of the cash surrender value that is taxable at normal income rates.
  3. Excess proceeds that are received from the amount mentioned in tier 2, will get taxed as capital gains.


Let’s say that you have paid a premium that is worth $128,000, and your cash surrender value is going to be $156,000. So, if you pass away, your beneficiary will receive 28,000 dollars.

However, if you receive a life settlement that is worth $160,000, the profit beyond the cash surrender value would come up to $32,000. Hence, you will receive a gain of $4,000; the interest that you earn will be used to pay for taxes.

While the example mentioned above is a more or less a general idea how of life settlement taxation works along with tax calculation, you can also make use of a settlement tax calculator to calculate the estimated amount. Although you will still need to get the calculations right with the help of a trusted tax advisor, this should be a priority.

Some of the terms you have to keep in mind related to life insurance are as follows:

  • Premium- It’s the amount you have to pay annually.
  • Cash surrender value- This is the amount of money your beneficiary will receive after you pass away
  • Life settlement transaction rate- This is the amount of money you will receive when you sell your life insurance policy.

Once you understand these terms, it gets easy to know how your policy will take on taxes. The cash surrender value does not involve tax because it’s the value that the beneficiary receives. Although, once you sell the insurance policy the amount of money you get, which is more than the cash value, you will get profit value. The profit value involves tax, and that is what you will have to pay for.

When should you start exploring life settlements?

When you think about life settlement taxation, it will stem from the decision to sell your life insurance policy. If you’re over the age of 70 and you have an unwanted policy, then it’s a good idea to sell the unwanted policy. If you’re between the ages of 60 to 70 you can also qualify for a life insurance settlement. A viatical life insurance settlement is for someone who is suffering from a terminal disease and their age is not usually considered for life expectancy. If you’re still uncertain whether you qualify for a settlement or not, then you can go for a life settlement appraisal.

Life settlement companies:

Many settlement companies ask for a minimum face value amount that will make you eligible to sell your insurance policy. Some companies will ask for $250,000 and some will go as low as $100,000, the minimal amount will vary on your health and medical condition as well.

Once you address your new goals (financially), you may have already reached your retirement age and now you may not need the insurance policy, this is where the option of selling it to a good settlement provider will come in.

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