Taxation of Business Owned Policies

In this lesson on taxation, we have looked at the general rules regarding the income tax status of viatical and senior settlements. There is an exception to these general rules, however, that applies when a viatical settlement is made in a business situation. We noted earlier in this lesson that a viatical settlement made to an individual whose life expectancy is 24 months or less is received entirely tax free, regardless of the use to which he or she puts those funds. This significant tax advantage does not apply to certain business-related viatical settlements.

The HIPAA tax benefits that make a viatical settlement tax free do not apply when the taxpayer receiving the viatical settlement proceeds has an insurable interest in the insured because the insured is the taxpayerís:

director
officer
employee

Furthermore, these tax benefits do not apply when the insurable interest of the proceed recipient results from the insuredís financial interest in the taxpayerís trade or business.

Despite these exceptions for viatical settlements paid in a business environment, business-related viatical settlements still receive tax breaks. Any viatical settlement subject to that business exception will, nonetheless, enjoy the same capital gains treatment that applies to senior settlements.