The life settlement industry was founded on a legal ruling almost 100 years ago.

I attended a great life settlement seminar today put on by LISA (Life Insurance Settlement Association). Among many other interesting and important facts I discovered that the industry was founded on a Supreme Court ruling from a case in 1911.

That ruling in 1911 established that life insurance was the property of the insured and must be attributed the same rights as most any other owned property. Notably, that you have the right to buy and sell it to interested 3rd parties.

The industry undoubtedly has some checkered past but life insurance settlements are now a major market force. The industry has strong regulation and a very active professional association that sets high standards. If you are thinking about making use of a life settlement, its a good idea to use a broker that is a member of LISA.

Request case studies and references from your life settlement broker to prove their worth.

A life inurance settlement is a major transaction arguably equal in complexity and value to real estate transactions. One of the best ways to make sure the life settlement broker you choose is high quality is to look at their track record. Make sure to request life settlement case studies and examples of cases that they have worked on and closed.

One thing that you may want to look out for is examples of complex cases where the life settlement broker is not just settling a policy but also buying replacement insurance. Life settlement companies who have the sophistication to successfully handle these more complex cases can often add huge value because of their broad knowledge.

Profits from the sale of life settlements are taxable. Only the death benefit from life insurance is tax free.
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.