Corporate planning with Life Settlements is becoming more common. Not long ago, few business owners had heard of Life Settlements stemming from corporate owned life insurance. Today, these transactions are a growing source of funds for corporations.
With today's robust secondary life insurance market, Life Settlements generate useful, unexpected cash for the corporate policy owner. A Life Settlement enables corporations and charitable organizations to sell qualified life insurance policies to a Life Settlement Funding company. On average, the policy owner receives three times more cash from a Life Settlement than the policy's cash surrender value. The leverage is even greater with a term insurance policy, which has no cash surrender value. The amount the policyholder receives for the policy is determined by the insured's age and relative health, and the policy's ratings, costs, and cash surrender value.
A corporation purchases a $10 million life insurance policy on a 65-year-old key executive in fair health to secure a loan. After the loan is repaid the policy has no further use. A professional appraisal of the policy might lead to a Life Settlement of 5% to 25% of the policy's death benefit.
While Internal Revenue Service (IRS) tax code very clearly addresses Viatical Settlements for those who are terminally ill, there is no specific section for Life Settlements. The prevailing opinion on Life Settlement taxation is:
*Amount up to basis of policy: zero tax.
*Amount between basis and Cash Surrender Value: Ordinary Income tax.
*Amount above Cash Surrender Value: Capital Gains tax.
With this kind of potential, every decision maker from the executive suite to the board of directors should learn about Life Settlements, and consider them as part of their overall business and personal financial planning. Executive contracts and employment guidelines should be reviewed, so as to facilitate life settlements in the future. Contact us to help convert unneeded life insurance into working capital.
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