Life Settlement Tax Rules Could Change Again

In addition, a new proposed law would let seniors sell their life insurance policies tax-free if they deposit the proceeds into a trust account to pay for long-term care and other qualified health expenses.

Under the proposal, as long as the proceeds are used to pay for permitted expenses, the accounts, including any investment earnings, would not be taxed during the lifetime of the account holder or such person's spouse.

H.R. 7203 — the Long-Term Care Account Act bill  — was introduced in the U.S. House of Representatives in November by Reps. Kenny Marchant, R-Texas, and Brian Higgins, D-N.Y.

Although the bill expired without being enacted into law when the 115th Congress ended, on Jan. 3, expectations are that it will be reintroduced. The bill benefits taxpayers by encouraging the use of private funds, rather than government resources like Medicaid.

Even though the life settlement industry has existed for 20 years and life settlements are now regulated in almost every state, life settlements remain underutilized, and policyowners often surrender their policies to the insurance company or let their policies lapse.

Leading life settlement providers like Coventry are doing their part to educate consumers about the option to sell their life insurance policy through a life settlement, but, according to the American Council of Life Insurers, life insurance policies with a combined face value of over $580 billion were lapsed or surrendered in 2017 alone .

In contrast, policyowners who choose to sell their policies receive on average more than four times the policies' cash surrender value, according to a 2013 study published by the London Business School.

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Neal Jacobs, CPA, is a managing director, finance for Coventry.