Greg Kizer, CAIA

Senior Vice President


Taxation on life settlements has always been a grey area for fiduciaries who decide to sell their client’s life insurance policy for a lump sum payment versus merely letting the policy lapse or be surrendered for a fraction of the value.

What is a Life Settlement and why can it be appropriate for corporate fiduciaries?

A life settlement is the sale of a life insurance policy, on a senior insured, for a payment greater than the cash surrender value but less than the death benefit.  The buyer of the policy takes over all premium payments and receives the death benefit upon the insured passing away.  It makes perfect sense in the right situation (policy is no longer affordable, no longer needed, going to lapse, etc.) for fiduciaries that serve as Trustee to consider a life settlement instead of simply having the policy lapse or be surrendered back to the insurance company for a fraction of the value.  Why?  The policy may be marketable in the secondary market and as Trustee, there is a duty to maximize the value of this asset which might be missed if it simply lapses or is surrendered. 

Determining the taxation from life settlements has been a real headache since IRS Ruling 2009-13 was enacted in 2009 which required policy sellers to reduce their tax basis in a life insurance policy by deducting “cost of insurance” charges from their cost basis (typically the amount of premium paid into the policy).  Many insurance companies have difficulty calculating a policy’s cost of insurance charges upon request.  As a result, it left a lot of ambiguity regarding the taxation of these transactions which only further complicated an already complex transaction.

The 2017 Tax Cuts and Jobs Act includes language that reverses IRS Ruling 2009-13.  This means that beginning in 2018, policy sellers will receive the same tax treatment as those who surrender their policies, eliminating the burden and ambiguity around calculating the tax for a life settlement transaction and also reducing the tax liability making life settlements more attractive.

The Life Insurance Settlement Association (LISA) has supported efforts to change the tax provisions since their inception in 2009, including support of legislation introduced in 2012 by Sen. Bob Casey [D-PA] and similar bills introduced by Rep. Patrick Tiberi [R-OH] in 2016 and again in 2017.  LISA staff met earlier in 2017 with the Majority Tax Staff of the U.S. Senate Finance Committee, as well as a Washington D.C. tax specialist to explore alternatives available to amend IRS Tax Ruling 2009-13.

“We are delighted that Congress has taken this important action to rectify an error in tax policy, which created an unfair burden on sellers of secondary life insurance policies,” said Darwin M. Bayston, CFA, president and chief executive officer of LISA. “We believe that seniors should be afforded the opportunity to realize the full value of their policies. This reform in the tax law further clarifies that the marketplace for life settlement transactions is safe, healthy and well-regulated.”


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