What is a Life Settlement?
Seniors are discovering the true value of their life insurance by utilizing a financial planning tool known as a Life Settlement. A Life Settlement is the sale of a life insurance policy for an amount greater than the cash surrender value of that policy. Most often, the buyer is a financial institution who provides a lump sum cash settlement in exchange for ownership (and future benefits) of the policy. The settlement price represents the present day value of the policy. It is determined by the insured's life expectancy and the anticipated cost of keeping the policy in force during the insured's lifetime.

The proceeds can be used in any way. They can even help purchase new lower costing coverage, thus reducing or even eliminating the policy owners out of pocket cost for life insurance. Click here to see some examples of actual successful Life Settlements.

When should a Life Settlement be considered?

  • When the insured is over the age of 65
  • When the insured has a Convertible Term, Variable Life or Universal Life policy with a face amount of at least $50,000.00
  • When the policy is about to be dropped or cashed in
  • When any type of new insurance or investment is under consideration
  • When new lower cost policies are available
  • When the insured has outlived the beneficiaries
  • When estates become smaller
  • When estate taxes change or no longer exist
  • When premiums become too expensive
  • When the insured has had a change in health
  • When a key man or business partner is retiring or a company is being sold
  • When there is a liquidation of assets due to bankruptcy

Click here for a scorecard to help you see if you are a good candidate for a Life Settlement.

Tax Implications
The sale of a life insurance policy may be a taxable event. Tax experts disagree on the details of taxation, but there is a general consensus that if the cash surrender value of the policy exceeds the premiums paid on it, the life settlement proceeds will be taxed as follows:

  • The portion up to the policy owner’s investment in the contract will be received tax free.
  • The portion exceeding the investment in the contract, but not exceeding the cash surrender value; will be taxed as ordinary income.
  • The portion exceeding the cash surrender value will be a gain, which in some circumstances may be a capital gain.
  • Where the cash surrender value of the policy is less than the investment in the contract, the IRS may take the position that only the cash surrender value represents a tax-free return of basis — and everything else is gain on the sale of the asset. This stance is not universally accepted, and Creative Capital Solutions does not give tax advice, so a professional tax advisor should be consulted.

If you would like to discover if a Life Settlement might make sense for you, contact Jerry Hays at jerryhays@ccs-indiana.com for more information.


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