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. Option A is wrong; the transaction is lawful when properly licensed. Option C ignores the §101(g) exclusion. Option D is fabricated; commercial providers, properly licensed, are the standard market for viaticals and life settlements.
Law Reference: California Insurance Code §10113.2 (viatical and life settlements)Practice all 315 questions free — no signup required.
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