Selling a life insurance policy can be a smart financial move—but many people wonder, “Are there taxes on life insurance settlement payouts?” The answer is: sometimes. Understanding the tax implications of a life settlement is crucial before moving forward.
At Summit Life Insurance, we guide policyholders through every step of the settlement process—including helping you understand how taxes may apply based on your unique financial and policy circumstances.
What Is a Life Insurance Settlement?
A life insurance settlement is when a policyholder sells their life insurance policy to a third party in exchange for a lump-sum cash payment. The buyer pays the seller, takes over the premium payments, and eventually receives the policy’s death benefit.
While life settlements can yield significantly more than the surrender value of a policy, the taxes on life insurance settlements can affect the net payout.
How Are Life Settlements Taxed?
Generally, the IRS breaks a life settlement payout into three parts:
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Tax-Free Return of Premiums Paid
You do not pay taxes on the amount you’ve paid in premiums. This portion is considered a return of your own money. -
Ordinary Income
Any amount received up to the cash surrender value of the policy (minus premiums paid) is taxed as ordinary income. -
Capital Gains
Any amount you receive above the surrender value is taxed as a long-term capital gain.
Let’s break that down with an example:
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You paid $50,000 in premiums
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The policy’s cash surrender value is $70,000
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You sell it for $100,000
Tax breakdown:
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$50,000 (tax-free)
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$20,000 (ordinary income)
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$30,000 (capital gains)
At Summit Life Insurance, we recommend discussing the breakdown with your tax advisor before finalizing any sale.
What About Viatical Settlements?
There’s an important exception for people with a terminal illness. If you qualify under IRS rules (usually life expectancy of 24 months or less), your viatical settlement may be completely tax-free.
To qualify for the exemption:
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You must be chronically or terminally ill, with proper physician certification
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The buyer must be a licensed viatical settlement provider
Summit Life Insurance works with licensed buyers and ensures compliance with IRS requirements to help qualifying clients avoid unnecessary taxes.
Florida Tax Rules for Life Settlements
Good news for Floridians: Florida does not have a state income tax, so you won’t owe any state-level taxes on your life settlement proceeds. However, you still need to report any federal tax obligations.
As a Fort Lauderdale-based company, Summit Life Insurance understands the local tax and insurance landscape and ensures every transaction is fully compliant.
Tips to Minimize Taxes on a Life Insurance Settlement
While you can’t completely avoid federal taxes on settlement proceeds (unless you qualify for a viatical exemption), here are some ways to reduce your tax burden:
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✅ Keep detailed records of all premiums you’ve paid
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✅ Consult a tax advisor to determine your basis
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✅ Consider timing the settlement to align with lower-income years
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✅ Work with a licensed broker like Summit Life Insurance to ensure the best possible payout
The more you receive above the surrender value, the more capital gains you may owe—so it pays to plan carefully.
FAQs: Taxes on Life Insurance Settlement
Q1: Will I owe taxes on the full amount I receive?
No. Only the amount above your premium payments and the policy’s cash value may be taxed. A portion of your proceeds will likely be tax-free.
Q2: What’s the difference between ordinary income and capital gains in this context?
Ordinary income applies to gains up to the policy’s surrender value. Capital gains apply to any additional profit beyond that.
Q3: Are life settlement proceeds taxed differently if I’m terminally ill?
Yes. If you qualify for a viatical settlement, your payout may be entirely tax-exempt under federal law.
Q4: Do I pay state taxes on my life settlement in Florida?
No. Florida has no state income tax, which makes it one of the most tax-friendly states for life settlement sellers.
Q5: Should I speak to a CPA before selling?
Absolutely. While Summit Life Insurance provides general guidance, we always recommend speaking with a tax professional to review your specific tax exposure.
Get Expert Help From Summit Life Insurance
Navigating the taxes on life insurance settlement proceeds can be complex—but you don’t have to do it alone. At Summit Life Insurance, we combine transparent market access, local expertise, and licensed financial professionals to help you make confident, well-informed decisions.
