Are Life Settlements Taxable?

People often ask if they will owe taxes from a life settlement and the answer is yes. When you sell something you own for a profit it is subject to tax. The next question is what tax rate is used and this is where it gets a little tricky. The IRS has not provided clear guidlines as to whether life settlement profits should be taxed as ordinary income or long term capital gains. I have spoken with CPA's who have reasonably argued both sides of the coin.

Obviously, paying capital gains tax is preferable to income tax but as with almost everything in personal finance each situation is unique. Your life settlement broker is not qualified to give you tax advice and you should consult your tax professional. What your broker can do for you is get a free market evaluation of your policy. This will give you a good understanding of the likely profit (or not) that you will make. Armed with this information you can make a solid decision as to whether a life settlement is the right choice.