On May 1, 2009, the IRS issued a pair of Revenue Rulings addressing the tax treatment of Life Settlement transactions. These Rulings discuss the tax treatment of the sale of life insurance policies to a third party and the surrender of a life insurance policy to the Carrier by the insured/original owner of the policy. In addition the Rulings cover the tax treatment of the Senior Life Settlement by an investor. These Revenue Rulings can be found on the Senior Life Settlements Resources page.
According to Kirk Van Brunt, a tax attorney with the law firm of Locke Lord Bissell & Liddell, the Rulings clear some tax treatment of senior life settlement issues up while leave others unresolved. Apparently, investors can include in the tax basis the cost of purchasing the insurance policy or policies and the premiums paid. But if the seller is the insured (original owner) then they can not include the “cost of insurance” in the “cost basis” of the Life Settlement transaction.
Since these Revenue Rulings are a little difficult for a non tax professional, I have also posted an opinion letter from Sidley Austin LLP. Sidley is one of only a few internationally recognized law firms to have a substantial, multidisciplinary practice devoted to the insurance and financial services industry. That opinion letter is also on the Senior Life Settlement Resources page.