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socrateaser, Lawyer
Category: Tax
Satisfied Customers: 39164
Experience:  Retired (mostly)
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I have a 250,000 annual renewable (convertible till age 70)

Customer Question

I have a 250,000 annual renewable (convertible till age 70) term policy i am planning to sell under a senior settlement . If I understand the tax situation correctly, the sales price is considered as a long term capital asset, and would be taxed at 15% . are there any exclusions, etc that would reduce the amount owed for federal taxes? Also, if I contractually converted to a universal life product first, and then sold the policy, what impact would that have on taxation?

In my state, I would also owe state taxes based on the federal AGI number...How would that state tax liability be impacted if I convert first?

Thank you for any assistance on these questions.
Submitted: 6 years ago.
Category: Tax
Expert:  socrateaser replied 6 years ago.
Surrender of a whole or universal life insurance policy is federally taxable as ordinary income, based upon the difference between the sale price less the premium cost basis. See IRS Rev. Ruling 2009-13.

Sale of the policy to a viatical settlement company is not subject to federal income tax. IRC § 101(g). Naturally, the viatical settlement will try to negotiate a sale that considers the tax savings involved in the transaction. But, this gives you some negotiating room, and you may be able to get a better overall deal from the viatical company.

Hope this helps.

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Customer: replied 6 years ago.
So the conversion first is a big tax long as the purchaser is a vialical settlement co....and the "senior settlement"qualifies as a viatical settlement...I have risk factors, but am not terminally ill...
Expert:  socrateaser replied 6 years ago.
I don't see any tax savings in a conversion to universal life, because the cost basis doesn't change. Re a senior settlement, you must be "terminally" or "chronically ill," or there is no tax savings at all, no matter to whom you sell.

A chronically ill person is one who is not terminally ill but has been certified (within the previous 12 months) by a licensed health care practitioner as meeting either of the following conditions.
  • The person is unable to perform (without substantial help) at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for a period of 90 days or more because of a loss of functional capacity.

  • The person requires substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment.

Hope this helps.