LISA-Endorsed Changes to IRS Treatment of Life Settlement Transactions Included in Landmark Tax Bill Passed by Congress
ORLANDO, Fla., Dec. 20, 2017 The 2017 Tax Cuts and Jobs Act, the sweeping tax legislation passed by Congress and expected to be signed into law this week by President Trump, contains an important reform to the way the Internal Revenue Service (IRS) has required calculating the taxable basis for life settlement transactions, a positive development for seniors who own a life insurance policy they no longer need or can afford.
The language in the new law reverses IRS Ruling 2009-13, which was enacted by the IRS in 2009. The Ruling requires policy sellers to reduce their tax basis in a life insurance policy by deducting “cost of insurance” charges over the elapsed term of the policy. Unfortunately, it was nearly impossible for many seniors to comply with this rule because it is extremely difficult to obtain a policy’s cost of insurance prior to its sale. Most insurance companies would not -- or could not -- provide that information, and some do not even keep track of these charges. As a result, the complex requirement may have caused many seniors to lapse or surrender their policies back to the insurance companies, rather than selling their policy for maximum financial value in the marketplace.
The reform enacted this week means that people who sell their life insurance policies will now receive the same IRS tax treatment as those who surrender their policies, eliminating an IRS burden that may have discouraged many seniors from exploring a life settlement transaction.
The Life Insurance Settlement Association (LISA) has supported efforts to change the tax provisions since their inception in 2009, including support of legislation introduced in 2012 by Sen. Bob Casey [D-PA] and similar bills introduced by Rep. Patrick Tiberi [R-OH] in 2016 and again in 2017. LISA staff met earlier in 2017 with the Majority Tax Staff of the U.S. Senate Finance Committee, as well as a Washington D.C. tax specialist to explore alternatives available to amend IRS Tax Ruling 2009-13.
“We are delighted that Congress has taken this important action to rectify an error in tax policy, which created an unfair burden on sellers of secondary life insurance policies,” said Darwin M. Bayston, CFA, president and chief executive officer of LISA. “We believe that seniors should be afforded the opportunity to realize the full value of their policies. This reform in the tax law further clarifies that the marketplace for life settlement transactions is safe, healthy and well-regulated.”
A life settlement is the sale by the owner of a life insurance policy for an immediate cash payment. The buyer of the policy assumes all future premiums payments and receives the death benefit upon the passing of the insured. According to a study by the U.S. Government Accountability Office (GAO), on average, consumers received four to seven times more from a life settlement than what they would have received from surrendering it back to the insurance company.
About the Life Insurance Settlement Association
The Life Insurance Settlement Association (LISA) is the nation’s oldest and largest organization representing participants in the life settlement Industry, with a current membership of more than 65 companies doing business in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. The mission of LISA is to promote the development, integrity and reputation of the life settlement industry, to advance the highest standards of practice and professional development for the industry, and to educate consumers and advisors about a life settlement as an alternative to lapse or surrender of a life insurance policy. For more information, visit www.lisa.org.