Rules & Regulations: Spending your Money After a Life Settlement
Wednesday, May 12, 2021

Section: Policy Holders

Life settlements are heavily regulated by both state and federal entities across the United States. This can be both a positive and a negative. More regulation comes with greater paperwork and often more expenses to meet compliance. However, this bureaucracy protects policyholders and ensures they are not easily swindled out of a life insurance policy they spent much of their life contributing into. 
Proceeds from selling life insurance can be a valuable source of liquidity for elderly policyholders who no longer need or want their life insurance policy. There are a few rules and regulations that come with the practice that consumers should know before dedicating themselves to the process. In this blog, we’ll discuss the laws surrounding life settlements and the proceeds attached to them.

Rules After Receiving Life Settlement Proceeds
Life settlement proceeds are used for a variety of reasons. Those who receive them may use them to clear debt, go on vacation, start a new business, or even pursue alternative investments. All of these actions are legal and allowed under state and federal law. There are no regulations pertaining to what you may be able to use your life settlement money on. Many policyholders will decide to ensure they place themselves in a comfortable position throughout retirement, and leave an inheritance to their beneficiary if possible. However, the funds can be used for anything the policyholder sees fit. 
There are, however, rules that life settlement companies will have to adhere to when offering a settlement to an individual. This includes things like ensuring the policyholder is not coerced to settle or sign paperwork when in duress, as well as protecting the privacy of the insured whether or not an agreement to settle is achieved. These are all points you’ll want to share with potential consumers when they are deciding if a life settlement is right for them. 

Life Settlement Taxes
While there are no regulations associated with what consumers can spend their life settlement money on, consumers may be required to pay taxes on the money received. Generally, no taxes are charged on the proceeds received from tax settlements. However, if you receive interest income in addition to a lump-sum payment, you will be required to pay taxes on the interest that is accumulated and paid out. For example, if a policyholder allows an insurance company to hold their settlement proceeds of $1,000,000 for a year at a 10% interest rate, the life insurance settlement purchase will be charged taxes on the $100,000 interest income received. 
If a policyholder names their estate as the beneficiary of a policy, rather than a human individual, the settlement proceeds will be subject to hefty estate taxes. This is easily avoidable by naming a person close to the consumer as the beneficiary or creating a life insurance trust to avoid taxation. 

Reach Out Today for More Insight
Life settlements are quickly gaining mainstream popularity and policyholders are taking notice. When speaking to a policyholder about their potential life settlement, it is important to keep the above facts in mind. They’ll be extremely glad that you’re able to guide them through the regulations and taxes associated with spending their life settlement proceeds.