Frequently Asked Questions About Life Settlement
We have compiled a list of the questions that many of our clients ask about Life Settlements.
Q: Why would someone sell their life insurance policy?
Q: What types of life insurance policies can be sold through life settlement?
Q: Is a Life Settlement legal?
Q: What happens to the policy after it is sold in a life settlement?
Q: Are there any costs or medical exams associated with life settlement?
Q: Do I have to sell my entire policy?
Q: How long does it take to sell my insurance policy?
Q: Are the proceeds from selling a life insurance policy taxable?
Q: Why would someone sell their life insurance policy?
A: There are many reasons why policy holders choose life settlement. Some of the more common are listed below:
- As part of a change in estate planning or investment objectives.
- To pay for healthcare costs for you or someone in your family.
- To fund a more cost effective life insurance policy. One out of every three settlements results in the insured creating a new life insurance policy.
- Premium payments are no longer affordable, or have become excessive.
- An alternative to surrendering the policy.
- To provide a cash gift to family members, or to a charity.
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A: A Life Settlement is a sale of your existing insurance policy to a third party for more than the cash value but less than the benefit.
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Q: What types of life insurance policies can be sold through life settlement?
A: All types of insurance policies can be sold including term, universal, whole life, variable and second to die.
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Q: Is a Life Settlement legal?
A: Yes, the Supreme Court made a ruling in 1911 that your insurance policy is an asset and may be bought or sold just like your own home.
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Q: What happens to the policy after it is sold in a life settlement?
A: All the rights and ownership of your policy are transferred to the new owner. You do not make any more premium payments.
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Q: Are there any costs or medical exams associated with life settlement?
A: There is NO cost at all and you do not need a medical exam.
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Q: Do I have to sell my entire policy?
A: No, it is possible to sell a portion of your life insurance policy. In this scenario, only the rights of the portion that is sold are transferred to EAGiL.
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Q: How long does it take to sell my insurance policy?
A: It generally takes about 6-10 weeks to complete the entire life settlement process.
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Q: Are the proceeds from selling a life insurance policy taxable?
A: Currently there is no Internal Revenue Code language regarding life settlements. Here are some general guidelines, provided as an example:
| Policy Face Value: | $ 2,000,000 |
| Premiums paid: | $ 115,000 |
| Cash Surrender Value: | $ 165,000 |
| Life Settlement Amount: | $ 500,000 |
The policyholder has a $2,000,000 Life Insurance policy with a Cash Surrender Value of $165,000 and total premium payments of $115,000. The Life Settlement Amount is $500,000.
In this example, the first $115,000 (from premiums paid, which is considered your cost basis) would be nontaxable. The difference between the premiums paid and Cash Surrender Value would be treated as ordinary income. The difference between the Cash Surrender Value and the Life Settlement Amount would be treated as a capital gain.
**We highly recommend that you seek the assistance of a professional tax advisor, to determine your individual tax situation.
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Call (888) 693-2445 for more information.