Tax Cuts and Jobs Act and Life Insurance Policies

A doubled estate tax exemption makes life insurance policies less necessary, while more
favorable basis rules decrease gain on their sale. The law known as the Tax Cuts and Jobs Act
(TCJA for short), approximately doubled the individual exemption from estate tax, which
increased from $5.49 million in 2017 to $11.18 million in 2018.

Life insurance is often employed to reduce the estate tax's financial impact. The doubling of the estate tax exemption diminishes the need for certain estates to use life insurance to cover the
estate tax. Life insurance owners whose assets are now sheltered by the increased exemption
may consider selling policies that are no longer necessary. Those who sell will also benefit from
more favorable basis rules.

The TCJA allows the seller of a policy to include all premiums paid in cost basis when
calculating taxes due on a settlement transaction. Thus, sellers of life insurance are now afforded
the same tax treatment as those who surrender their policy. Policy owners are now therefore
more likely to sell an unwanted policy to a third party rather than simply surrendering the

Determining the cost of insurance was problematic because the life insurance carrier typically
could not provide the necessary information. This made it difficult for the seller to calculate cost
basis. However, because the TCJA allows for the inclusion of the cost of insurance in cost basis,
separately accounting for it is no longer necessary. It is simply included in the amount of all
premiums paid by the owner.

In summary, the TCJA will likely fuel increased growth in the life settlement market. Thousands
of life insurance policies made unnecessary by the increased estate tax exemption may now be
sold, with minimized taxable gain.