Life Settlement Taxes After the Tax Cuts and Jobs Act of 2017 (2025 Update)
For decades, the tax treatment of life settlement transactions discouraged seniors from selling their policies. That all changed with the Tax Cuts and Jobs Act of 2017 (TCJA), which reshaped how life settlement taxes are calculated. Today, policyholders benefit from rules that are clearer, simpler, and far more favorable.
Fair warning, we are not tax experts. But we can provide basic information to help you and your accountant get started.
If you’re considering selling your life insurance policy in 2025, here’s what you need to know about how the TCJA continues to impact your tax obligations.
What the TCJA Fixed
Before 2017, the IRS required policyholders to reduce their tax basis by subtracting “cost of insurance” (COI) charges. The rule was nearly impossible to apply correctly — insurers rarely tracked COI data, and policyholders faced higher taxes on life settlements than on policy surrenders.
The TCJA repealed this requirement. As of 2017, policyholders:
No longer reduce their tax basis by COI charges
Calculate gains on settlements the same way as on policy surrenders
Benefit from a simpler, more transparent system
This change removed a significant barrier for seniors considering life settlements.
How Taxes Work on Life Settlements Today
The tax treatment of a life settlement in 2025 depends on how the payout compares to what you’ve already paid in premiums and to the policy’s cash value.
Return of Premiums (Basis): The amount you paid in premiums is always tax-free.
Ordinary Income: If your settlement payout is higher than your basis but less than or equal to the policy’s cash surrender value, that portion is taxed as ordinary income.
Capital Gains: Any amount above the cash surrender value is taxed as capital gains.
Example (Post-TCJA Rules):
Settlement payout: $500,000
Cash surrender value: $350,000
Premiums paid (basis): $250,000
Result:
First $250,000 = tax-free return of basis
Next $100,000 = ordinary income
Final $150,000 = capital gains
This formula has been consistent since 2017, giving policyholders confidence in how proceeds will be taxed.
Why the 2017 Changes Still Matter in 2025
Even years later, the TCJA’s reforms remain one of the most important consumer protections in the life settlement industry. By leveling the playing field between surrendered and sold policies, Congress effectively put more money back into seniors’ pockets.
For retirees, that means:
More net cash proceeds from a sale
Less tax complexity compared to pre-2017 rules
A stronger financial planning tool for those who can no longer afford premiums or who no longer need coverage
Important Considerations in 2025
While the TCJA simplified things, taxes on life settlements can still vary depending on your situation:
State taxes: Some states have additional tax rules for life settlements. For example, New York has specific rules for viatical settlements that differ from federal law.
Medicaid planning: Settlement proceeds may count as income or assets when determining Medicaid eligibility.
Broker vs. direct buyer: An independent life settlement broker ensures your policy is shopped to multiple buyers, maximizing offers — which directly impacts the taxable gain you’ll report.
Key Takeaway
The Tax Cuts and Jobs Act of 2017 removed the unfair tax treatment that once plagued life settlement transactions. In 2025, life settlement taxes remain simpler and more favorable for seniors — making selling a policy a smarter financial option than it was just a decade ago.
Still, every case is unique. Policyholders should always consult both a qualified tax advisor and a licensed life settlement broker to ensure they maximize their settlement and minimize tax liability.