Please confirm my thougts ons sale of investment insurance products

[Bay ArEA]

I've got a new Client with two new business that sell or hold life insurance investments. I've never had this type of business before and wanted to see if you folks agree with my assessment.
The first business purchases life insurance settlement contracts and puts them into a trust it does not own or control ran by a 3rd party, then sells interests in that trust, usually within a year. As it sells them the 3rd party pays them. I believe an inventory method wold work with this as it is buying an inventory of life policies, and then selling them to customers. Do you agree?


The next business purchases investment life insurance policies to hold till maturity itself, and gets income from investors in the form of promissory notes with no monthly payment or time limit, just a flat percentage when the contract is paid. I believe for this one I would amortize the contracts, not count the loans as income, and count the contract maturity as income, put the payments of interest as a deduction against the income. Do you think that is right?

Thanks for any input.

[Burke]

In both cases, these would be called viaticals. An entity buys out the cash value of a life insurance contract from the owner of the policy for a lump sum. That purchaser can then change the beneficiary to itself, as it becomes the new owner and has all the rights to make changes on the contract and to receive proceeds at the former owner's death. This apparently has evolved into a business where the underlying value of the contracts are marketed to others. This would appear to change the character from tax-free death benefits to a taxable gain situation, but I have never dealt with this particular scenario. Are you also doing the trust return? The trust would have the grantor's basis presumably. Then, on top of this, the trust is selling interests in the trust. Complicated. The insurance company only has an obligation as long as premiums are paid (which must continue), to pay death benefits when the original insured dies. They would go to whomever is beneficiary at the time, which looks like it would be the trust. Under the circumstances you describe, I would tend to agree with the inventory method. The selling of the trust's interests would generate income to pay premiums. Am not sure I have a grip on comment "as it sells them ( the interests) the 3rd party (trust) pays them." Pays what and to whom? And I am not at all sure the tax-free treatment of death proceeds by the recipient would hold under these circumstances. I would definitely research this arrangement with the laws in your state and the background of these clients. You appear to be in CA. Did they give you any kind of written documents or rules on these?

[Burke]

In the 2nd scenario, you said they hold (the contracts) "till maturity." Do you mean death of the insured? You say there is no monthly payment or time limit on the promissory notes. I am assuming you mean no payment of principal -- but a currently amortized interest rate is paid (at maturity) in addition to the outstanding loan to the investor. The investor loans would not be income, IMO, since there IS an obligation for the company to repay them. The amortized loans and interest would be a liability of the owner-company, but so would the premiums to the insurance company, if they want the benefits paid to them. There is no law that requires premiums to be paid. If I were an investor, that would definitely be a contingent written into any loan agreement. Would the business continue to own these contracts? These would assuredly be long-term obligations on the part of this business, unless they involve much older policyholders. What would be the incentive for an investor to wait maybe decades for his money and the risk they would not lapse? Do you know what the average term would be? Is the company thinking these payouts "at maturity" would be tax free? I, as an investor, would also definitely want to know what the track record and capitalization/assets of this company are. And I guess you have to ask yourself, do I want to be involved in a bankruptcy or some scheme which runs afoul of state law?

[Bay ArEA]

Apparently viaticals are only if the insured is near death, otherwise it's a "Life settlement" The death benefit is certainly not tax free, the IRS made that clear, it needs to be ordinary income not a capital gain I'm fairly sure. They had a great report that covers things similar to this situation, bu not quite the same situation here: https://www.federalregister.gov/docu...cations-to-the I am not doing the trust return thankfully which makes my job easier. When I mentioned "At maturity" yes, I meat at the death of the insured. At the part where I said " as it sells them ( the interests) the 3rd party (trust) pays them." I mean when my client's corporation sells ownership interests in the trusts owned by the 3rd party administrator to an investor, that 3rd party administrator then pays my client's corporation a commission.

You had several questions that relate to the viability of the investment, since they were quite pertinent to the tax return I don't know a lot of them, but apparently how it works is they put together about ten policies in a portfolio to get a better average payout time, which will be something like eight or ten years. When the investment is purchased, the purchase price includes an amount set aside by the third party administrator to pay the monthly premium payments on the insurance policies monthly. The amount set aside can sometimes be exceeded, in which cases the investors would have to pay in more to keep the policies from lapsing.

[Burke]

It makes more sense for this type of venture to work if they purchase the type of life insurance policy which has a variable investment factor. It could be that the underlying investment portfolio would be sufficient to pay the annual premiums so it could relieve the company of that dilution of income. It would also entail more risk, however, in that the investment funds inside the policy could also decrease as well as increase. In an old-fashioned, straight whole life insurance contract, the cash values are fixed, guaranteed and stated in the policy contract. It is becoming common for entities to purchase annuities for a present-value sum to give the owner immediate funds and then have the rights to the monthly income, such as from lotteries, prizes which pay for life, etc. Looking forward to reading through the link you provided.