LOS ANGELES, April 8, 2024 /PRNewswire/ — LifeRoc Capital, a direct life settlement provider and recognized leader in the life settlement industry, has recently been educating financial and tax advisors and life insurance policyholders on the existence of new and improved guidelines on the taxation of life settlements spelt out in the “Tax Cuts and Jobs Act (TCJA) of 2017″. LifeRoc believes the TCJA provides needed clarity to financial and tax advisors, accountants, and policy sellers on how the IRS will seek to tax, or not tax, the income derived from the proceeds of the sale of a life insurance policy through a life settlement.
TCJA Tax Benefits of Life Settlements
TCJA has demonstrably improved the federal income tax treatment for life settlement sellers, enhancing the overall favorability on life insurance policy sales and has subsequently been backed up by the IRS’s recent clarification issuance, Rev. Rul. 2020-05.
Here is how the federal income taxation of life settlements now works:
- Determining a Policy’s Tax Bases: The sum of all premiums paid by a policyholder to the insurance carrier are now treated as the policy’s tax basis, which is no longer reduced by the value of the life insurance coverage provided by the policy before its sale.
- Inclusion of Pre-conversion Premiums: For permanent life insurance policies which were converted from a previous term life policy, premiums paid before the conversion on the term policy are now included when calculating the policy’s tax basis.
- Income Tax-Free Up to Tax Basis: Life Settlement proceeds paid to the seller up to the policy’s tax basis are not subject to income tax or capital gains tax, except to the extent described below.
- Situations Where Cash Surrender Value Exceeds Cost Basis & Purchase Price Exceeds CSV:
- Ordinary Income Taxation for Excess Amounts: Life Settlement proceeds paid to the seller exceeding the policy’s tax basis and up to the policy’s cash surrender value are now taxed at ordinary income rates.
- Capital Gains Treatment for Excess Amounts: Life Settlement proceeds paid to the seller in excess of the policy’s cash surrender value are then treated favorably under capital gains tax rates.
- Situations Where Cash Value Is Below Cost Basis & Purchase Price Exceeds Cost Basis:
- Capital Gains Treatment for Excess Amounts: Life Settlement proceeds paid to the seller in excess of the policy’s cost basis are then treated favorably under capital gains tax rates.
- Handling of Policy Losses:
- When Surrendering A Policy: when surrendering a policy at a loss does not qualify for an income tax deduction unless the policy was acquired for profit motives, as per IRC Section 165.
- When Settling A Policy: when selling a policy at a loss, the loss may qualify for a capital gains deduction if the seller has other sources of capital gains to offset the loss against.
TCJA in Action: $1 Million Dollar Case Study
Using a simple but powerful illustration, LifeRoc outlined the possible financial advantages of a hypothetical life settlement under these current tax laws. For example: If a life insurance policy with a face value of $1 million, initially issued 12 years ago, has $70,000 in paid premiums, then the policy now, with a cash surrender value of only $80,000, could be sold for $300,000.
Under TCJA regulation, a transaction like this greatly benefits from a significantly advantageous tax treatment – with only $10,000 of the sale subject to income tax as ordinary income. While the remainder, a substantial $220,000, would qualify for capital gains tax treatment – a major potential benefit for the seller.
Speak with a LifeRoc life settlement professional to request a free policy appraisal today. Or follow LifeRoc on social media to learn more about individual policy valuation options: LinkedIn, Facebook, YouTube.
Disclaimer: LifeRoc Capital DOES NOT provide tax, estate planning or financial advice. This press release is for informational purposes only and is not intended as tax advice. Policyholders are encouraged to consult with their own qualified tax professional for advice on their specific situation.
About LifeRoc Capital, LLC
LifeRoc is a fully licensed direct life settlement provider helping professional advisors unlock the value of life insurance policies for their clients. Collaborating with the nation’s top financial institutions, independent trust firms, financial planners, attorneys, and CPAs, LifeRoc navigates the intricate world of life settlements with a high-touch concierge approach. LifeRoc serves high net worth and ultra-high net worth markets as a premier direct life settlement provider. Learn more at www.LifeRocCapital.com.
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SOURCE LifeRoc Capital
