Do you, or someone you know, have a life insurance policy that you are paying premiums on but the insured could really use some cash now? One little noticed nuance about the Tax Cuts and Jobs Act of 2017 (TCJA) was a provision that changes the treatment of sales of life insurance contracts.

Previously, if you owned a life insurance policy and sold it before it matured, (more bluntly, death) then there would likely be a taxable event measured by the amount of proceeds received versus the payments made on the policy, reduced by the value of insurance coverage during the time the policy is held. The effect of this was to treat a life insurance policy as any other type of investment and that the amount invested did not include amounts applied to pay for coverage.

Under the new law, all amounts paid on the contract will be treated as investment in the policy. This will result in many policies being able to be sold prior to “maturity” by the holder, and recognize little or no gain, possibly a loss, on the sale of the policy to a third party.

In some situations this could result in much needed funds going tax free to an elderly insured prior to death.

What’s even more beneficial is the effective date. The TCJA provided that this treatment applies to all such transactions after August 25, 2009. That is not a typo. So if you previously sold a life insurance contract and reported gain on sale according to the old rules, and that sale occurred after August 25, 2009, you may want to amend your old tax return and get a refund of taxes paid. There may be some Statute of Limitations restrictions that might prevent those older years from opening up, so be sure and consult with a tax advisor before you launch into amending returns.

The only fly in the soup is California. California has not conformed to most all of the TCJA and as such you will likely have a state tax to pay on this type of transaction. Again, be sure and do the math before you commit to a sale.

Read more tax articles from Paul’s tax blog