A life settlement is the sale of an existing life insurance policy for an amount greater than its cash surrender value but less than its net death benefit. The person who is insured under the policy is called a life settlor. This person may or may not own the policy. If the insured does not own the policy, the owner cannot sell the policy without the insured’s consent.
WHY SELL A LIFE INSURANCE POLICY?In the past, if an owner of a life insurance policy found that the policy was no longer needed due to changed needs or circumstances, the owner could elect to cancel the policy and receive the policy’s cash surrender value as a lump sum. The majority of policies are taken out for income protection and circumstances may change so that the policy is no longer needed or premiums have become excessive. Now it is possible to sell a policy for more than the cash value.
HOW DOES A LIFE SETTLEMENT WORK?Life Distributors of America (LDA) will ask the insured to complete an application along with policy and medical release forms so they can gather the necessary information from the life insurance company as well as the insured's physicians. All information gathered must be kept confidential and cannot be given to anyone without the insured’s written approval. The amount offered for a policy is based on several factors; such as how long the insured is expected to live, amount of the premium payments, the rating of the insurance company and policy provisions (i.e. a waiver of premium rider).
WHAT are the tax consequences? In general proceeds are:
• Tax free up to the amount paid in premiums
• Taxed as ordinary income up to the cash surrender value
• Taxed as capital gains on the excess
Individual circumstances may vary and you should consult your tax advisor.
LDA does not provide legal, tax, accounting or financial advice.
