The taxable amount is based on the amount of the loan that exceeds your policy basis. Remember that the policy basis is the portion that you paid as premium. Amounts “above basis” are based on interest or investment gains at present value.
One way to access all of your cash value and avoid taxes is to include the amount that is on your policy basis – this is not taxable. Then get access to the rest of the cash value with a loan – also not taxable.
You sell the life insurance policy
There is a market for existing life insurance policies, particularly cash value life insurance policies that insure people who are terminally ill or have a short life expectancy. Transactions involving terminally ill policy owners are called “settlements.” This involves an investor, such as a company that specializes in buying policies, who pays you money for the policy, becomes the owner of the policy, and then makes the life insurance claim when you die.
Viatic settlements are usually used as a way for patients to get money for medical bills, especially when selling a life insurance policy means getting more money than simply turning it in for the cash value.
Fortunately, the IRS doesn’t treat any portion of what you receive as taxable under a statutory arrangement. Under IRS code 101 (g) (2), any amount paid by a third-party settlement provider is treated as a payment of the death benefit – and death benefits are not taxable.
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