ID Trends Summer 2022 - Page 27

SUMMER 2022 27
Awareness and access to life settlements has grown considerably with consumers now seeing ads on TV and online daily .
Taxation
Life Settlement Annuity : A life insurance policy can be settled to fund other financial vehicles such as an annuity . Life settlements can provide 5x-10x more value than surrender value significantly amplifying the amount of funds available to roll into an annuity . This can be a tax-advantaged option to help protect and manage funds to augment a senior ’ s retirement income and help with the expensive costs of health and long-term care . Retained Death Benefit : A life insurance policy can be settled for a reduced , paid-up death benefit to continue financial protection for a family . This allows a policy owner who can no longer afford to pay premiums the chance to keep a portion of their death benefit without making any future premium payments .
Expanded awareness and access
A couple of factors have made the life settlement market more mainstream and available to policy owners than ever before . Awareness and access to life settlements has grown considerably with consumers now seeing ads on TV and online daily . Professionals working with seniors can access life settlements directly with policy buyers through fee-based referral arrangements . This is considered a no-load life settlement and is a growing option in the market for professionals such as registered investment advisors , attorneys , accountants , long-term care service providers , and insurance agents that do not want to work through a broker and hold a life settlement brokerage license themselves .
Fiduciary responsibility and legal action
Over the last decade , policy owners have brought lawsuits against advisors and carriers for not informing them of their legal rights to a life settlement as an alternative to the lapse or surrender of a policy . To hedge against potential legal and financial liability , advisors are adding life settlements to their practice .
The Tax Cuts & Job Act of 2017 ( TCJA ) simplified the tax consequences of selling a life insurance policy via a life settlement .
1 Tax Free – Proceeds received up to tax basis in a policy ( i . e ., the total amount of premiums paid ) are not taxable
2 Ordinary Income – Proceeds received in excess of tax basis up to the amount of a policy ’ s cash surrender value are taxed as ordinary income 3 Capital Gains – Remaining proceeds are taxed as capital gains
However , if a policy on the life of an insured who is a “ chronically ill individual ” or a “ terminally ill individual ” is sold to a licensed life settlement provider , the sale price is treated by the IRS as an amount paid under the policy by reason of the death of the insured , and the entire amount of the sale proceeds can be received by the policy owner tax-free .*
Regulated states
43 states and the territory of Puerto Rico , representing 90 % of the U . S . population , regulate life settlements . In recent years , there has been regulatory and legislative support to increase access to life settlements for policy owners in need of long-term care supports and services . Congress introduced a bi-partisan bill into the House of Representatives H . R . 5137 to create a “ Senior Health Planning Account ’’ ( SHPA ) which would allow anyone who accesses a life settlement to then shelter the proceeds tax-free in the SHPA exclusively to pay for the use of health and long-term care related expenses .
Trending up
The life settlement market continues to grow as a financial option for policy owners who no longer need or can no longer afford to keep their asset in-force . Many people don ’ t realize that their death benefit can help them address financial challenges brought on by retirement , declining health , or long-term care needs . But for policy owners considering lapsing or surrendering a policy , there is more awareness , access , and advisor support to life settlements than ever before .
* Retirement Genius does not provide tax or legal advice . Nothing herein should be construed as investment , insurance , securities , tax or legal advice .