When considering a Life Settlement, it’s important to understand the potential tax implications. Selling a life insurance policy can provide financial relief, but you must be aware of any applicable taxes.
Proceeds from a life settlement are generally taxable income, requiring you to report the amount received on your tax return. The exact tax owed depends on factors like the type of policy sold and your tax situation. For permanent life insurance policies (whole or universal), the taxable portion is calculated using your cost basis (total premiums paid). Any amount received above this basis is taxable income.
Taxes may also apply to investment gains; if your policy has accrued cash value, any gains are taxed at capital gains rates, which vary by how long you held the policy.

Certain deductions can offset the tax burden. Medical expenses related to a chronic or terminal illness may be deductible from your taxable settlement. Outstanding loans against your policy can also adjust the cost basis and reduce tax liability. If you have a terminal or chronic illness, some proceeds may be tax-free, as the IRS recognizes the need for financial support.
Additionally, estate taxes could apply if life settlement proceeds are part of your estate. This is significant for those with large estates and valuable policies.
Consider tax implications carefully before selling a life insurance policy, as they affect your overall return. Consult a financial advisor or tax professional to understand potential taxes and explore ways to minimize them through proper planning.