Question from a reader:”I was approached by insurance people saying that I could sell my life in separate insurance policies and that it is tax deductible. I can’t find anything about this on the IRS website so I am asking you. Can you help me?”
My answer is if by help, can I keep you from breaking the law, sure. It sounds like you are about to think about getting Viatical Settlements. I don’t think they are illegal and from a more practical point I think you are setting yourself up to get murdered. Here is a reprint from an earlier blog that may shed some light on your question.
Question for Kim from a reader:”Hi Kim, I invested in a Viatical Settlement Investment. The deal is that you buy a portion of someones life insurance policy and become a beneficiary. When the person died, I received from the company a portion of the benefits in the form of 1099-Misc income. Can I expense anything from it? How do I report it?”
My answer is that this must be the hot new scam in investing. You aren’t the only person who has been talking to me about these investment insurance deals. I met one guy who claimed to have resold his life several times a year ago and I haven’t seen him this year. Maybe he oversold himself and the people who had insurable interest on him murdered him or as they would say in business “cashed out their investment”. Esssh. Or should that be a red laser sniper scope dot on the forehead followed by a “BAM”?
Anyways, my take on this is that I suspect the IRS is going to look a lot closer at 1099-Misc statements in general and more specifically Viatical Settlements. It sounds like you would have to be an insurance company to do this and selling multiple interest in a person’s life sounds like it violates terms of most life insurance policies.
To the matter at hand – how would you report this income? I would say either it goes on Line 21 for the 1040 as Other Income or on a Schedule C, Income from a Sole Prop business. I think putting it on a Schedule C though would also not really be correct despite what certain pundits are saying because you are trying to offset income with expenses on an insurance policy. Unless you are a state or nationally approved insurance company authorized to sell life insurance it sounds fishy.
The approach I would take is that you should show the income in Line 21 for the Form 1040 and then take your unreimbursed business expenses subject to the 2% haircut rule on Schedule A, if you have enough other deductions to use the Schedule A. It isn’t dollar for dollar but it should be acceptable by the Internal Revenue Service and any respective State taxing authorities that follow the Fed guidelines.
My suggestion for anybody thinking of selling their life on the other side of the deal is to note that these deals are still super grey area to illegal because most life insurance companies will not allow you to monetize your life multiple times (read the fine print of your policies).
The deals usually are also for people who are older (in their sixties or older) and have to have a clean health bill – no cancers, no heart problems, nothing that you are sick or dying of.
There is also the risk that the companies investing in you may decide not to wait for their investment to pay off and decide to cash you out early. Bottom line: Unless you want to be a human target you may not want to get one of these deals or invest in one. Your mileage and life expectancy may vary…
As you can see from the post, it sounds fishy.
Be well people and check something out once and twice before you decide to enter into it, especially if it is a business proposition that involves you dying!
October 12 2009
Kim Isaac Greenblatt
Viatical Settlements Again?