How Can Taxes Affect Life Settlements?

Life settlements are transactions where a plan holder sells his or her life insurance policy to life settlement providers in exchange of cash. The life settlement provider now takes responsibility of paying the premiums of the plan and eventually gets the full benefits as the original plan holder dies. Life settlements are great for generating large amounts of cash in a small period of time. Seniors sell their life insurance policies when they realize they don't really need it or they need the cash for other purposes. By selling the policy these people get a hold of cash that can be used for emergency cases or for whatever purpose. Usually life settlements are win-win situations, but before committing to any sale one must consider that there are a lot of factors that affect the amount of cash from life settlements. One of the factors is tax.

Life Settlement Taxes: An Overview

One of the many features of life insurance policies is the tax advantages. As the plan holder dies, the estate or the heirs have to pay money for the estate taxes on the other hand the beneficiary of the policy receives all the things that the policy offers without spending a dime for taxes. Tax exemption and any other tax advantage is cancelled on the event that there is an involvement of a third-party such as a life settlement provider.

The investor will have to pay for the income taxes on the difference of the face value of the insurance policy as well as the total amount of the premiums made and the price tag of the plan. There are exemptions to this tax rule. One is when the life settlement provider is in partnership with the original policyholder and the other is when the life settlement company has the original policyholder as a shareholder. In case the provider is simply buying life insurance policies or facilitating life settlements where the original policy owner is not a partner or a shareholder, the returns will be taxed as regular income. The following are the other things you must know about life settlement taxes:

Paid Premiums

As this is counted as the returned capital, the sum of all the premiums made by a policyholder will not be taxed.

Income Tax

The difference between cash surrender value of the policy and all premiums paid for coverage is taxed as ordinary income. If the planholder chooses to return the policy to the insurance company that issued it in exchange for the cash surrender value, he or she would have the same tax obligations.

Taxes on Capital Gains

The tax on capital gains is implemented when an amount, which is received and documented, goes beyond the policy's cash surrender value. The policy is then defined as a capital investment if the ownership of the life settlement goes beyond 12 months.

Basically taxes on life settlements are heavy for the providers but the plan holder can still get large amounts of money with the sale of their policy. Studies show that the pay out from the life settlement brings a plan holder five times the surrender value of the policy. Indeed there's a lot to be received in life settlements with the consideration of some factors that may greatly affect the process of the settlement. It's important to get information on the whole process especially taxes to get the most out of the settlement.