Life settlement taxation hadn't been covered by the IRS because the industry is so new. Even though the life settlement industry has been around since the late 1990's, the IRS didn't give clear direction on how the proceeds from a life settlement should be taxed. There were some generally accepted practices among tax professionals that seemed to be the de facto rule, but the Internal Revenue Service was conspicuously silent. That has changed. The recent ruling still has some scratching their heads.

With just 5 states left that do not have laws pertaining to life settlements or viatical settlements, the number of unregulated states is dwindling. Although, California, New Mexico, Minnesota, Michigan, Illinois, Massachusetts, Delaware and New York regulate just viatical settlements, many of these states have their eyes on legislating the broader life settlement market. California and New York have broad, sweeping bills in the works aimed at the life settlement industry. They are being watched closely due to their large life settlement markets and consumer friendly regulatory environment.

The average life settlement is for a life insurance policy with a face value between $1.5 million to $2 million. However the average face amount of a life insurance policy is $320,000. So why the disconnect? Why is the average face value of a life insurance policy sold in a life settlement so much higher than the average face amount of an in force life insurance policy?