Life Settlements

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by Steve Goodman

CPA, MBA – President & Chief Executive Officer

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Introduction

Life insurance is an assignable asset. It can be given away, transferred, or sold. With a life settlement, the owner of a life insurance policy sells the policy to a third party in exchange for cash. The owner receives less than the amount of the death benefit but more than the cash surrender value. The third-party buyer will pay all future premiums and collect the death benefit when the insured dies.

A wide range of different types of life insurance policies may qualify for a life settlement. These include term (if convertible), whole life, universal life, variable universal life, and survivorship.

Life settlements are usually used by seniors who are at least 70 years old or have a life expectancy of fewer than 12 years. Ideally, the insured has owned a policy worth at least $200,000 for at least two years. Other factors, such as the insured’s health status and the cost of the policy, also may factor into the life settlement decision.

A life settlement may make sense in the following circumstances:

  • The insured and his or her family no longer need the policy due to new financial circumstances.
  • A better-performing policy with more affordable premiums can now be purchased.
  • The insured can no longer afford the policy premiums.
  • The policy’s beneficiary has died.

Various criteria determine the value of a life settlement, such as the insured’s gender, age, health status and life expectancy; ownership structure and outstanding loans (if any); the number of premiums; and the policy’s cash surrender value.

Taxes on policies sold are calculated as follows:

  • A policy with a cash value equal to or less than the premiums paid incurs capital gains on the sale price less the premiums paid. Assume a policyholder paid $100,000 in premiums for a policy he/she sold for $250,000. The policyholder would pay capital gains taxes on the $150,000 profit.
  • A policy with a cash value that exceeds the premium paid incurs ordinary income on the amount the cash value exceeds the premiums paid. Assume a policyholder paid $100,000 in premiums for a policy he/she sold for $250,000. The policy has a cash value of $125,000 reflecting $25,000 in accumulated gains. The policyholder would pay ordinary income on the $25,000 and capital gains on the remaining $125,000.

Depending on the circumstances, a life settlement may or may not be a wise choice for a senior. Professional advisors, such as financial advisors, CPAs, insurance professionals, and estate planning attorneys, should perform due diligence on life settlements so they can help their clients make the right choice.

Steve

CPA, MBA – President & Chief Executive Officer

About Steve Goodman

For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.

He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.

Email Steve today for the business succession planning you deserve.

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It took a lifetime to build your legacy. Give us a call to see how we can help you preserve it.

It took a lifetime to build your legacy. Give us a call to see how we can help you preserve it.

Steve

Get in touch with Steve Goodman today

CPA, MBA – President & Chief Executive Officer

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