Viatical Settlement Tax Information
Life Settlement Tax Implications

Ideal recommends that you contact your financial planner or accountant for tax advise regarding a life settlement or life redemption. We provide general information below as a reference. Feel free to have your financial planner or accountant contact Ideal for any assistance is helping you make an educated decision.

Viatical Settlements (Life Redemption)

Individuals with life expectancies of two years or less receive their life redemptions tax-free. Ideal recommends that our clients work with a financial planner to discuss taxes and life settlements. If you currently do not have a financial planner, we can recommend one to you.

Life Settlements (senior settlement)

Taxation on senior settlements has many different variables that can make it complicated to estimate. Below is a reference to better determine tax consequences of a life settlement.

Scenario 1

Cash surrender value is zero or less than the premiums paid. It is taxed as a capital gain and the amount taxed is determined by the Settlement amount minus premiums that have already been paid on the policy

Example: Cash Surrender Value $10,000 | Premiums paid is $120,000 | Settlement Amount $500,000

$500,000-$120,000=$380,000 taxed as capital gains

Scenario 2

If the cash surrender value is greater than the premiums paid on the policy then the different between the premiums already paid and cash surrender value is taxed as ordinary income tax. Then the amount between the settlement amount and the cash surrender value is taxed as capital gains.

Example: Cash Surrender Value $100,000 | Premiums paid is $90,000 | Settlement Amount $500,000

$100,000-$90,000=$10,000 taxed as ordinary income
$500,000-$100,000=$400,000 taxed as capital gains

Scenario 3

If the premiums paid is greater than the surrender value then there should be no tax at all. In fact, this is considered a loss and maybe treated as so.

Remember that over half of insurance policies lapse because of unaffordable premiums. As a result these people earn no return on their investment. Ideal can make sure this will not happen to you.


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