This is very important news and could have an effect on the pricing models of investors, providers, and funders.

The Internal Revenue Service (the “IRS”) has issued two rulings on participants in the life settlements industry.  This ever-expanding investment strategy entails the sale of life insurance policies to third party investors, who may themselves re-sell the policies or hold them to maturity (the death of the insured).  The life settlements industry has grown from a small “niche” market to a major international market where billions of dollars of capital are invested.  Both rulings are “revenue rulings,” which are rulings of general applicability and a high level of authority, albeit not as authoritative as regulations.

Sen. Herb Kohl, chair of the United States Senate Special Committee on Aging, sent a letter to Treasury Secretary Timothy Geithner requesting clarification from the Internal Revenue Service on the tax treatment of life settlements. In response, on May 1st, the IRS issued two rulings, Revenue Ruling 2009-13 and Revenue Ruling 2009-14, addressing significant taxation issues for life settlement transactions.

What is covered is taxation of the insured:

In Revenue Ruling 2009-13, the IRS analyzes three fact patterns in which the insured neither received distributions nor took out policy loans against the policy, which in the first two scenarios has a cash surrender value and in the third case has no cash value.

And Taxation of the Secondary Market Holder (Domestic):

Revenue Ruling 2009-14 also sets out three factual cases. The first is a mirror image of the third case discussed above, involving the sale of a 15 year level – premium policy with no cash value.

The scenarios are fully documentated in the complete article from HedgeCo.net

IRS Issues Two Groundbreaking Rules on Life Settlements

More info coming to Life Settlement Tax…