If a policy owner sells their term life insurance policy, they will owe taxes on the amount of sale proceeds that are greater
than the policy owners nominal basis. The nominal basis is the unearned premium at
the time of the sale. The proceeds in excess are considered long-term capital
gains.
To find the amount of the Life Settlement that is subject to taxation, we subtract the nominal basis from the total proceeds of the sale.
Taxable Long Term Capital Gains = Sale Proceeds - Nominal Basis
Example: The policy owner of a term life insurance policy sells it for $40,000. The former policy owner's nominal basis is $12,250.
Taxable Long Term Capital Gains = $40,000 - $12,250