RE-EVALUATING LIFE SETTLEMENTS
IN THE NEW TAX ENVIRONMENT
Traditionally, the owner of a permanent life insurance policy had one choice when he or she wanted to cash in a policy-surrender the policy and receive the cash value.
Beginning about twenty years ago, some third party companies began to offer the owners of policies on terminally ill insureds the ability to viaticate the policy. In such cases, the viatical settlement company would make an offer to the owner to purchase the policy for a substantial percentage of the policy’s death benefit.
As the market for viatical settlements developed, variations appeared. For example, some life carriers offered accelerated benefit options, effectively allowing policyowners early access to the death benefit when the insured was determined to be terminally ill.
Companies that formerly focused on viatical settlements expanded their offers to buy policies with older or medically impaired insureds-not just from those terminally ill.
The expansion of the viatical settlements to situations involving more healthy insureds transformed the focus of the market from viatical settlements to life settlements.
From the policyowner’s perspective, when should a life settlement be pursued?
The first decision a policyowner must make is based on the need for the coverage. Are the original reasons for the policy purchase still important? Are there any new compelling factors that would argue in favor of keeping the policy? If the answers to these questions are no, then perhaps a life settlement should be considered.
The second decision to be made is economic. Does it make financial sense to settle a policy? The answer to this question depends in part on how much the settlement company will offer, and in part on the tax treatment of the settlement amount.
In Revenue Ruling 2009-13, issued earlier this year, the IRS published its stance on the tax results when a policy owner settles a life policy. In the ruling, the Service answered many of the questions that experts had been unsure about. The IRS’s answers have a significant impact on those who are-or will be-considering life settlements.