A 70-year-old insured with a $500,000 universal life policy and a terminal cancer diagnosis sells the policy to a licensed California life settlement provider for $300,000 in cash. Which statement is correct about this transaction?

Explanation

California Insurance Code §10113.1 through §10113.3 (and successor sections governing life settlements) require that any person acquiring an existing life insurance policy from a terminally or chronically ill insured for value be licensed as a viatical or life settlement provider, follow disclosure rules, observe rescission periods, and protect the seller from undue pressure. Under IRC §101(g)(2), payments to a TERMINALLY ill insured (defined as having a physician-certified life expectancy of 24 months or less) from a qualified viatical settlement provider are treated as if received as a death benefit and are therefore excluded from gross income — so identifying this as a viatical settlement with income-tax-free proceeds and a provider licensed under §10113.2 is correct. The claim that the sale is illegal because the provider holds no insurable interest is wrong; the transaction is lawful when properly licensed. Treating the sale as a surrender that makes the whole $300,000 ordinary income ignores the §101(g) exclusion. And the assertion that only family members or their trust may buy the policy is fabricated; commercial providers, properly licensed, are the standard market for viaticals and life settlements.