Are you considering cashing out your term life insurance policy? Unfortunately, selling a term life policy to investors is nearly impossible unless you are terminally ill and unlikely to outlive the policy.
You do have one potential option: you could name a relative as the beneficiary in exchange for a payment and their agreement to take over all future premium payments.
This type of arrangement creates significant tax consequences:
- Taxable transfer. The IRS will likely treat the transaction as a “transfer for value.” You, as the transferor, must recognize taxable income if the payment you receive exceeds your basis in the policy. Your basis equals the total premiums you paid before the transfer. If you owned the policy for more than one year, you’ll pay tax at long-term capital gains rates.
- Taxable death benefit. If you die while the policy is still in effect, the beneficiary will be required to pay tax on the death benefit. Typically, life insurance proceeds are tax-free. However, in this situation, the beneficiary can exclude only the amount equal to what they paid for the policy, plus any premiums paid after the transfer. The IRS taxes the rest at ordinary income rates.
- No deductible loss. If you outlive the policy and the beneficiary receives nothing, the IRS will not allow a deductible loss.
Sterling Tax and Accounting is here to help your business with tax planning! Our comprehensive approach to tax planning helps reduce your overall tax liability and keep more money in your pocket. If all your accountant does is file your taxes, chances are they are making you pay more than your fair share of taxes.
How We Can Help
Learn how to proactively save on taxes by scheduling a call with our tax planning specialists.
Our tax planning, accounting & business services help you stay on track. Sterling Tax & Accounting will work with you to optimize your business and minimize your taxes. We will work to provide you and your business with the tools and resources you need to build a solid tax and business foundation. We’re a trusted CPA Firm in Sarasota, Florida. We serve clients all over the US, and proactively work to minimize their taxes.
Welcome to the Sterling Standard of business! Want to learn more? Schedule a meeting with our tax planning team here: https://www.sterling.cpa/contact-us/
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