Life Settlement Tax Rules Could Change Again

The Life Insurance Settlement Association is about to meet in New York for the ninth annual Life Settlement Institutional Investor Conference. Here’s a look at the state of the life settlement market by an executive at Coventry, one of the major market players.

What if seniors already owned a valuable asset that they could use to generate income and pay for rising health care expenses/?

If they own a life insurance policy, they might already qualify to sell that policy for cash in a transaction called a life settlement. And two recent developments are starting to change the tax landscape to make it more advantageous for policyowners

(Related: Life Settlement Investors Head to New York)

The Tax Cuts and Jobs Act of 2017 (TCJA) simplified the tax the consequences of selling a life insurance policy by reversing an IRS ruling that required the policy seller to reduce his or her basis in the policy by the cumulative cost of insurance charges, thus resulting in an increased taxable gain.

The TCJA clarified that life settlements should have the same, more favorable, basis as policies that are surrendered to a life insurance company.

In addition, a new proposed law would let seniors sell their life insurance policies tax-free if they deposit the proceeds into a trust account to pay for long-term care and other qualified health expenses.

Under the proposal, as long as the proceeds are used to pay for permitted expenses, the accounts, including any investment earnings, would not be taxed during the lifetime of the account holder or such person’s spouse.

H.R. 7203 — the Long-Term Care Account Act bill  — was introduced in the U.S. House of Representatives in November by Reps. Kenny Marchant, R-Texas, and Brian Higgins, D-N.Y.

Although the bill expired without being enacted into law when the 115th Congress ended, on Jan. 3, expectations are that it will be reintroduced. The bill benefits taxpayers by encouraging the use of private funds, rather than government resources like Medicaid.

Even though the life settlement industry has existed for 20 years and life settlements are now regulated in almost every state, life settlements remain underutilized, and policyowners often surrender their policies to the insurance company or let their policies lapse.

Leading life settlement providers like Coventry are doing their part to educate consumers about the option to sell their life insurance policy through a life settlement, but, according to the American Council of Life Insurers, life insurance policies with a combined face value of over $580 billion were lapsed or surrendered in 2017 alone .

In contrast, policyowners who choose to sell their policies receive on average more than four times the policies’ cash surrender value, according to a 2013 study published by the London Business School.

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Neal Jacobs, CPA, is a managing director, finance for Coventry.