The 2017 Tax Cuts and Jobs Act includes language that reverses IRS Ruling 2009-13

The 2017 Tax Cuts and Jobs Act includes language that reverses IRS Ruling 2009-13

Policy maturity can become even more problematic for universal life plans, as the benefit by contract varies and these plans are usually funded with the intent of minimizing cash value

Determining the taxation from life settlements has been a real headache since IRS Ruling 2009-13 was enacted in 2009 which required policy sellers to reduce their tax basis in a life insurance policy by deducting “cost of insurance” charges from their cost basis (typically the amount of premium paid into the policy). Many insurance companies have difficulty calculating a policy’s cost of insurance charges upon request. As a result, it left a lot of ambiguity regarding the taxation of these transactions which only further complicated an already complex transaction.

This means that beginning in 2018, policy sellers will receive the same tax treatment as those who surrender their policies, eliminating the burden and ambiguity around calculating the tax for a life settlement transaction and also reducing the tax liability making life settlements more attractive.

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.”

In the past few years, we have had clients approach RIC with questions regarding “maturity date” and “maturity extension provisions” and their significance on life insurance policies. Historically an unseen risk, due to enhancements in medical care and good health habits, insureds are living longer and the odds of surviving to policy maturity are increasing. The risk of the insured living to maturity is especially true for policies issued prior to 2009, which utilized older mortality tables developed in 1980 or even back as far as 1952. It is not unusual for these contracts to have policy maturity at insured age 90, 95 or 100.

If the insured lives to the “Maturity Date,” the policy will pay the cash value amount in a lump sum to the owner

The scope of this issue is significant. Surrendering a policy while still alive or being forced to surrender it, due to outliving the maturity date with no maturity date extension available, can create a taxable event causing the owner to lose one of the most tax favored benefits provided by life insurance, following a lifetime of faithfully paying premiums. Most policies issued post-2009 are priced using the 2001 Commissioners Standard Ordinary (CSO) tables with updated trending. The current tables calculate mortality probabilities to the insured’s age of 121 payday loans in Fredericksburg. Death benefit coverage or “policy maturity” normally extends to this age, guaranteeing the contract will carry to the death of the insured.

Typically for whole life plans, the policy is designed to endow at maturity of the contract, which means the cash value equals the death benefit. Still, without a maturity extension available in the contract, a taxable event will occur. Thus, trustees need to further understand what “maturity extension provisions” may be provided in the contract. The maturity extension clause will specify final resolution of the contract, once death occurs. Below is a list of different “maturity extension provisions” available on universal life policies, ranging from most desirable to least desirable.

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