When considering life insurance settlements or any other financial planning option, clients are counseled to contact their tax advisor. As a general rule, ordinary income tax rates apply to the difference between the basis of the policy and the cash surrender value. Capital gains tax rates are then applied to the difference between the cash surrender value and the net life insurance settlement proceeds received. For example, a life insurance settlement transaction represented by a $2,000,000 face value policy with a cash surrender value of $120,000, a net cumulative premium of $50,000 (basis), and a life insurance settlement offer of $400,000, would result in ordinary income tax rates being applied to $70,000 ($120,000-$50,000) and capital gains tax rates being applied to $280,000 ($400,000-$120,000).