While we view the development of a secondary market for life insurance policies in general as a positive one, advisors should approach proposed Stranger Owned Life Insurance (SOLI) transactions with caution, if at all.

The past several years have seen the rapid development of a secondary market for existing life policies: the so-called “life settlement” market. Unlike a “viatical settlement,” which is the tax-free purchase of a policy on a terminally ill individual (as defined by the Internal Revenue Code), a typical life settlement is a taxable purchase of a policy on the life of a relatively healthy person. The full tax consequences of a life settlement are as yet unclear and await IRS guidance, although it seems relatively certain that there is potential taxable gain to the policy owner (to the extent that the amount received in settlement exceeds the owner’s basis in the policy) and to the purchaser (to the extent that the proceeds received at the death of the insured exceed the amount paid for the policy). Despite the tax cost, though, as shown in the table, a life settlement, properly structured, can produce a very favorable result.