Life settlement options have proven to be viable investment strategies for the investor considering diversifying the portfolio. Yet one thing to factor in to any life settlement agreement is taxes. Unlike the arrangement for life insurance policy holders, life settlement owners or beneficiaries do not benefit from an income and capital gains tax-free status. In fact, most life insurance policies stipulate that the tax exclusion is voided if the policy is sold or transferred for some value to a third party beneficiary, which includes life settlement providers and investors. Now the policy beneficiary is liable for all taxes related to the transfer or sale of the policy, and if the life settlement provider is a life settlement broker or group whose specific business is to buy insurance policies, the provider will be expected to pay income tax on the gain, as it is considered ordinary income. The amount of income taxes paid is on the difference between the policy face value and the purchase price and any premiums paid. The exceptions are: For the policy holder too there are taxes to consider. In a typical surrender situation, the policy holder is required to pay taxes on any gain from the surrender of a policy. Assuming a $1 million policy and a surrender value of $200,000, the policy holder would be taxed at federal and state levels, which would reduce the payment significantly. In a life settlement arrangement, the policy holder’s tax rate would be the same (assuming the same capital gains tax and state income tax rate), but the payout could be more in the range of $500,000 minus those taxes, which would give the policy holder a much higher tax, but also a much higher net payout. However, life settlement arrangements are not always taxed. For example, any amount the policy holder receives up to the adjusted cost basis amount is exempt from income tax and capital gains tax. In the view of the IRS, any premiums attributable to the cost of insurance should not be considered as an increase in basis. Still, any amount a policy holder would receive on amounts over the adjusted cost basis and to the cash surrender value will be taxed at ordinary tax rates. And any amount a policy holder receives over and above the cash surrender value of the policy is subject to capital gains tax. This last tax stipulation was written for the life insurance market in 1941 and has yet to be tested for viability in the life settlements market. If you’re a life settlement broker or a policy holder considering your life settlements options, the experts at Opulen Capital can help you determine your or your client’s tax situation for any given life settlement arrangement. Located in La Jolla, California, Opulen Capital is a specialized financial services firm focusing on products and services tailored for senior citizens. Opulen Capital is one of the leading firms offering Life Settlement opportunities for high net worth clientele. We leverage unrivaled experience and exclusive relationships in the life settlement marketplace to structure, obtain, and sell life insurance products to maximize cash profits for our valued clients. Opulen Capital’s mission is to continue to provide the best solutions for our clients through the highest level of integrity and service. For more information, visit our website at http://www.OpulenCapital.com or call Opulen at 877-OPULEN-1 (877-678-5361)
