Life Settlements and Accountants
Accountants and CPAs with senior, corporate or charitable organizations as clients are in a position to offer increased value through an awareness of life settlements. CPAs are empowered when they have an understanding of the life settlement solution and when its application is appropriate.
CPAs are are an integral part of the financial advising circle that are replied upon for their important financial advice. As such, the ability to introduce life settlements to clients will provide a much needed financial planning tool.
Life settlements provide solutions for financial planning objectives.
Senior clients of CPAs can benefit from life settlements in the appropriate situation. Life settlements will reduce costly premiums and increase cash for other uses. In fact, a June 2008 online article, in the The Journal of Accountancy stated "Under the right conditions, sales of a life interest may be a good policy". Below are just some of the situations when a CPA may find "the right conditions" to assist their senior clients with life settlements that enhance the senior's financial portfolio.
- Finance long term care
- Estate planning changes
- Provides liquidity for other investments
- Enables cash gifts to family members
- Creates cash for living expenses or large purchases
Life settlements in a business environment
Life settlements have a valuable place in the business environment. Often overlooked, life settlements represent a new source of capital for profit, operating expenses or debt reduction. Most often life settlements relating to a business center on key man life insurance policies. Life settlements may be appropriate in a business or corporate context when:
- A life insurance policy was required as part of a small business loan that is no longer needed because the loan is paid off
- A key executive has retired and the coverage is no longer needed.
- Finance life insurance premiums on retired executive's successor
- Business purchased or sold - key man no longer needed for an individual
- Infuse capital into a business for operating expenses, bridge periods of low revenues or debt reduction
- Executive can retain policy after leaving company but is overinsured or doesn't want to pay premiums
- Business sold and proceeds fund former owner's retirement
Life settlements for charities
Charitable organizations often rely on CPAs as advisors to their financial affairs. When used properly, life settlements can effectively stabilize income and budgeting, while reducing the management burden of a life insurance policy. Charities that can leverage life settlements will find themselves in a better position to help their community and provide for the needs of their constituents. Charitable organizations that incorporate life settlements as an option for their donors will find their inherent flexibility an attractive tool. In addition, life settlements represents a creative strategy for charitable giving, while the proceeds of a life settlement transaction offer an attractive tax deduction for the donor. The online article of the January 2008 The Journal of Accountancy, Life Insurance: What's it worth? (And Who Says?) is a good resource to evaluate the potential deduction of an in force life insurance policy donated to a charity and offers talking points about the benefits of policies being donated with the intent of the charitable organization selling it in a life settlement transaction.
- Avoid annual policy reviews, management costs and record keeping of policies
- Eliminate expense of costly insurance premiums
- Use life settlement proceeds instead of drawing down other investments
- Immediate infusion of money allowing charity to immediately use funds for various programs
- Tax deductions for donors
Life Settlement Resources for Accountants
Although the Internal Revenue Code provisions don't specifically address income through life settlement transactions, there are some generally accepted guidelines CPAs can utilize. The cost basis of a life insurance policy is based upon the amount of premiums paid. The difference between the life settlement amount and the cost basis is treated as a capital gain, when the cost basis is more than the cash surrender value (or a policy has no cash surrender value). If the cash surrender value (CSV) exceeds the cost basis, then the portion of a life settlement equal to the difference between the cost basis and the CSV is treated as ordinary income. The life settlement amount above the Cash Surrender Value is then treated as a capital gain. If the life settlement amount is below the cost basis, the settlement represents no taxable income. Below are links to additional information regarding the evaluation, appraisal, deductions and tax liabilities of life settlement transactions and charitable donations of life insurance policies.
- Capital gain treatment on difference of sale price over the higher of CSV.Jun. 2008, Journal of Accountancy: Virtues and Evils of Life Settlement.
- Calculating tax implications of life settlements Sep. 2005, Journal of Accountancy: Turn Unwanted Policies Into Cash.
- Appraising a life insurance policy donated to charity Jan. 2008, Journal of Accountancy: Life Insurance: What's it worth? (And Who Says?).
Life Settlements are an essential tool for CPAs and Accountants
The sale of life insurance policies through life settlements are an important aspect of both personal and business financial planning. Life settlements have become an accepted strategy for CPAs when advising clients on estate planning, tax planning and charitable donation matters. An increased awareness of this valuable tool could net your client substantially more than the cash surrender value offered by the insurance company. Life insurance policies with; coverage not ideal for a client's needs, obsolete key man policies, high premium payments or term policies are ideal to evaluate for life settlement prospects. Now your clients can sell their policies on the secondary market to maximize their asset's value and generate the highest return.