In a recent article, where we reviewed the tax consequences of life settlements, we remarked that it is quite common for a policy sold in a life settlement to be sold at a loss (less than its tax basis) and produce no taxable gain.
As a result of this statement, we fielded several questions from producers asking, "why would I tell my client to sell their policy at a loss?"
Unfortunately, this question indicates a fundamental misconception of what life settlements are all about.
A life settlement is an alternative to lapsing or surrendering a policy, it is not an alternative to keep it.
Life settlement investors only buy policies that offer them significant returns, so significant, in fact, that if a policyowner is able to and wants to keep their policy, it would be financially unwise to sell it in a life settlement.
However, once it is determined a policy is no longer wanted, needed or affordable and it is about to be terminated, then a life settlement should definitely be considered.
The proper measure of gain or loss on a life settlement transaction is not based on how much was paid for the policy, but rather how much more the seller is getting compared to the alternatives: lapse or surrender.
Why would a policy no longer be wanted, needed or affordable? The most common reason is a change in the financial situation of the client making the policy unneeded or unaffordable.
This could be a change in their estate or business situation, retirement, divorce, or death of an intended beneficiary.
Robin S. Weinberger, CLU, ChFC, CLTC, is the director of national accounts for Life Insurance Settlements Inc. She has been a general agent and director of national accounts for Connecticut Mutual and vice president of marketing for Sun Life of Canada. She can be reached at 
