Is the money from a life settlement taxable?
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Often, part of it. What you paid in premiums usually comes back tax-free. The amount above that is generally taxed, in two different ways.
How proceeds are usually taxed
Your cost basis, cash surrender value and sale proceeds help determine the taxable amount. Generally, these layers apply only to the portion of proceeds above the preceding threshold.
| Layer | Portion of proceeds | Usual treatment |
|---|---|---|
| 1 | Up to your adjusted cost basis, generally premiums paid | Generally not taxed |
| 2 | Above cost basis, up to cash surrender value, if any | Generally ordinary income |
| 3 | Above the greater of cost basis and cash surrender value | Generally a capital gain |
When different rules can apply
Different rules may apply for qualifying terminally or chronically ill insured people. State taxes and needs-based public benefits can also affect your decision. A capital gain is not automatically long-term; your circumstances matter.
What to do next
Talk to a qualified tax professional before accepting an offer. Bring your policy statement, premium records, loan information and proposed sale terms.
General information, not tax, legal or financial advice. Rules and circumstances vary. Consult a qualified professional before making a decision.