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TAX & FINANCIAL IMPLICATIONS
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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 net cash surrender value of the policy exceeds the premiums paid on it, the life settlement proceeds will be taxed as follows:
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- The portion up to the policy owner's investment (premiums paid) in the contract will be received tax-free
- The difference between premiums paid and the net cash surrender value will be taxed as ordinary income
- The portion exceeding the net cash surrender value will be a gain, which, in some circumstances, may be a capital gain
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An insured contemplating selling his or her life insurance policy should always seek advice and counsel from a professional tax advisor.
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Neither GE Insurance Services nor any of its financial professionals provide any tax advice. Clients should consult their insurer or tax advisor regarding their specific circumstances.
Viatical and other policy options may offer tax-favored options. Clients who are chronically or terminally ill may be eligible for a viatical settlement, and as such, may be able to receive those benefits on a tax-free basis. Terminal illness is defined as a person having a life expectancy of 24 months or less (36 months or less in some states).
A life settlement transaction may affect your eligibility for state and/or federal government programs such as Medicaid and Food Stamps or other programs. Advice should be obtained from the appropriate government agencies. Also the proceeds may be subject to creditor claims.
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