Freda Lockhart asked about a concern of hers:
Is there a tax liability for senior cashing in insurance policy?
so…..John M replied:
What kind of tax liability would my father have for cashing in a 1.5 million dollar life insurance policy? He’s 75, has a modest pension and investments, and collects social security. Are there any options he should consider in terms of when he cashes this in? We checked with the company and its just a matter of filling out a form to get the proceeds of the policy, so the main issue remaining is are there any tax angles to consider. Thanks!
3 responses so far ↓
1 Helen, EA in PA // Jan 6, 2009 at 10:32 am
It depends on what his basis (what he paid in to the insurance) is and what he is getting out of it. Assuming this is NOT an annuity, if he gets out more than he paid in, the difference is taxable.
Helen, EA in PA
2 Mathew // Jan 9, 2009 at 9:12 pm
In most cases he is only taxed for the amount of the distribution that is greater than what he paid in over the life of the policy. If that is the case the taxable portion of the distribution is added to his ordinary income an taxed at his marginal rate.
3 lifesen // Mar 7, 2009 at 10:28 am
Typically, any amount paid for a policy in excess of the cash surrender value is treated as a capital gain. The cash surrender value in excess of the basis in the policy is treated as ordinary income. As with this or any other major financial decision, we strongly recommend that sellers of policies seek the advice of a financial consultant or tax advisor.
An added benefit is that yoiu will never have to pay another premium payment.
A Life Settlement is the sale of an existing life insurance policy that results in a cash payment to the policyholder larger than the cash surrender value of the policy.
Institutional investors purchase policies in exchange for the beneficiary assignment. Life Settlements typically pay 2 to 5 times the “cash surrender value” — the amount the policyholder would get from the insurance company for surrendering the policy.
A secondary market is where a product is bought and sold after it is initially offered in the primary market. Stocks, bonds, mortgages, real estate and life insurance policies are examples of products sold in secondary markets. The secondary market for life insurance consists of institutional investors such as pension funds and hedge funds.
Almost every type of life insurance policy is considered for a life settlement including: Universal Life, Variable, Convertible Term, Survivorship, Key Person, Whole Life, and Group. Policies can be owned by individuals or entities such as trusts, corporations and charitable organizations.
Find out more at life settlements.
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