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Life Health > Life Insurance

Ask the expert: reporting settlement transactions

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The question was: I heard recently that the proposed federal budget includes a proposal that affects life settlements and would require reporting of life settlement transactions to the Internal Revenue Service. Is that correct and how will it affect policyowners who are selling their policies pursuant to a life settlement?

The answer is: President Obama’s proposed budget for fiscal year 2010 does include a proposal regarding life settlements.

The President’s proposal would require entities that purchase an interest in an existing life insurance contract-a life settlement-with a death benefit equal to or exceeding $1 million to report the purchase price, the buyer’s and seller’s taxpayer identification numbers (TINs), and the issuer and policy number to the IRS, to the insurance company that issued the policy and to the seller.

If adopted, the proposal would apply to life settlements entered into after December 31, 2010. Reporting would likely be made by a life settlement provider, or possibly an investor that takes an interest in a life insurance policy through a life settlement contract, using a 1099 report form to be developed by the Internal Revenue Service.

As the US Department of Treasury explains, sales of life insurance policies are already subject to taxation and, therefore, the proposal to require reporting simply ensures that sellers will pay the appropriate taxes associated with the sale.

While there is some question about the scope of the reporting requirement-for instance, why does the buyer have to provide TINs to the insurance company that issued the policy?-and some question about what the 1099 form will ultimately look like, this proposal should not impact a policyowner’s decision to enter into a life settlement.

Since the sale of a policy is already subject to taxation-and since most state laws require policyowners to be advised of tax consequences and to obtain expert tax advice-policyowners who are weighing the benefits of a life settlement should not be affected by this proposal.

Michael Freedman
Senior Vice President, Government Affairs
Fort Washington, Pa.


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