Ask your CPA for one number before you accept any offer: the taxable portion of the proceeds, not the gross amount — because IRMAA is calculated from modified adjusted gross income, and the part of a life settlement that represents a return of the premiums you already paid is generally not income at all. Sellers routinely assume a $220,000 settlement adds $220,000 to their income. On a policy where cumulative premiums were $95,000, it often adds far less, and the difference is frequently enough to keep a household under the next IRMAA threshold entirely.
The second thing to understand is the delay. The Income-Related Monthly Adjustment Amount is based on your tax return from two years earlier. A transaction closing in 2026 affects your 2028 Medicare Part B and Part D premiums, not next month’s. That two-year lag is the whole reason timing matters, and it is also why the surcharge blindsides people — it arrives long after the money has been spent.
Pine Lake Life Solutions provides education and a free policy review. We do not purchase policies and are not licensed in every state. Nothing here is tax advice; IRMAA planning is exactly the kind of question to put to your own CPA before a transaction closes.
In This Article
How IRMAA Actually Works
Most Medicare beneficiaries pay a standard Part B premium. Higher-income beneficiaries pay that standard amount plus a surcharge on both Part B and Part D. The Social Security Administration determines who owes it using modified adjusted gross income, defined for this purpose as adjusted gross income plus tax-exempt interest income, taken from the federal return filed two years earlier.
For 2025, the standard Part B premium was $185.00 per month, and the first IRMAA tier began above $106,000 of MAGI for a single filer and $212,000 for a married couple filing jointly. CMS resets the standard premium and the bracket thresholds annually, so confirm the current-year figures directly with CMS or the Social Security Administration rather than relying on a figure you read somewhere — including this page.
Two structural features matter more than the exact numbers. First, it is a cliff, not a phase-in. One dollar of MAGI above a threshold moves you into the entire next bracket. There is no gradual ramp. Second, it hits both Part B and Part D, and it hits each spouse separately. A married couple filing jointly who cross a threshold pay two surcharges, one for each enrolled spouse, on two programs. That doubling is the piece most estimates leave out.
Only the Taxable Layer Counts
This is where the real planning happens, and it is worth being precise about the layers.
Under the framework Congress confirmed in the Tax Cuts and Jobs Act of 2017 — which repealed the basis-reduction rule the IRS had applied in Revenue Ruling 2009-13, a change the IRS addressed again in Revenue Ruling 2020-05 — a life settlement is generally taxed in three layers. Proceeds up to your cost basis, broadly total premiums paid, are treated as a return of capital and are generally not income. The layer between cost basis and the policy’s cash surrender value is generally ordinary income. Anything above the cash surrender value is generally capital gain.
Only the second and third layers land in adjusted gross income. On a policy with substantial premiums paid over decades, that can be a small fraction of the gross proceeds.
A concrete illustration. Suppose gross proceeds of $240,000, cumulative premiums paid of $130,000, and a cash surrender value of $150,000. The first $130,000 is generally return of basis and not income. The $20,000 between basis and surrender value is generally ordinary income. The $90,000 above surrender value is generally capital gain. MAGI increases by roughly $110,000, not $240,000. Whether that crosses a threshold depends entirely on the household’s other income.
Get the basis figure documented before closing rather than reconstructing it in April. See how to establish cost basis, the basis rules in detail, and the overall tax treatment.
The Viatical Exception Changes Everything
If the insured is terminally or chronically ill, the analysis may not apply at all.
Under Internal Revenue Code section 101(g)(2), amounts received on the sale of a policy on a terminally ill insured to a viatical settlement provider licensed in the insured’s state are generally treated as paid by reason of the insured’s death and excluded from income. Section 101(g)(1)(A) defines a terminally ill individual as one certified by a physician as having an illness reasonably expected to result in death within 24 months. A separate, narrower exclusion applies to chronically ill individuals.
Excluded income is not in adjusted gross income, and therefore not in MAGI, and therefore has no IRMAA consequence whatsoever. That is a substantial planning difference between an ordinary life settlement and a viatical one, and it depends on a licensing fact you can verify: whether the buyer holds a viatical settlement provider license in the insured’s state. Ask for the license number and check it with your state insurance department before signing anything.
| Transaction | Counts Toward MAGI? | IRMAA Effect | Timing of Impact |
|---|---|---|---|
| Life settlement, healthy insured | Only the layer above cost basis | Possible one-year surcharge | Two tax years later |
| Viatical settlement, terminal illness | Generally excluded, IRC 101(g)(2) | None | None |
| Accelerated death benefit | Generally excluded, IRC 101(g) | None | None |
| Surrender | Gain above basis is ordinary income | Same exposure as a settlement | Two tax years later |
| Policy loan, policy stays in force | No | None | None, unless the policy later lapses |
| Reduced paid-up or extended term | No current income | None | None |
| 1035 exchange | No current income | None | None |
Why Form SSA-44 Usually Will Not Rescue You
Beneficiaries who expect an IRMAA determination based on outdated income can file Form SSA-44, titled “Medicare Income-Related Monthly Adjustment Amount — Life-Changing Event,” and ask Social Security to use a more recent year instead.
The form lists the qualifying events, and the list is closed: marriage, divorce or annulment, death of a spouse, work stoppage, work reduction, loss of income-producing property due to a disaster or other event beyond your control, loss of pension income, and receipt of an employer settlement payment due to employer bankruptcy or reorganization.
A life settlement is not on that list, and neither is any other voluntary one-time sale of an asset. Selling a policy, a house, or a stock position is a one-time income event, not a life-changing event in the statutory sense. Filing SSA-44 on that basis will be denied.
What does help is the passage of time. Because IRMAA is recalculated annually from a return two years back, a single-year income spike produces a single year of surcharge and then falls away automatically. You do not need to file anything to make that happen — but you do need to be prepared for a bill that arrives two Januaries later and then disappears the following year.
Where SSA-44 can apply is if a genuinely qualifying event happens in the same period, such as a spouse’s death or a retirement. In that case the form is worth filing on its own merits.
Timing and Structuring, Honestly Assessed
There are fewer levers here than people hope, and it is better to know that up front.
Splitting across tax years. Some transactions can be structured with an installment or deferred payment component, spreading recognition. Whether that is available depends entirely on the buyer, and it introduces counterparty risk in exchange for a tax benefit. That trade needs real analysis, not a rule of thumb.
Choosing the closing year. If you are near the end of a calendar year and near a threshold, closing in January instead of December moves the entire recognition into the following year. Since a settlement typically takes 60 to 120 days from first review to funding, this is often a matter of when you start rather than when you decide. See timing considerations for a sale.
Managing other income in the same year. Deferring a Roth conversion, delaying discretionary IRA withdrawals beyond required minimum distributions, or harvesting capital losses in the same year all reduce MAGI. These are standard CPA moves and they are far more effective than anything specific to the settlement.
Charitable giving. A qualified charitable distribution from an IRA reduces the taxable amount of a required minimum distribution and therefore MAGI. Ordinary itemized charitable deductions reduce taxable income but not adjusted gross income, and therefore do not help with IRMAA. That distinction catches people out.
What does not work: filing SSA-44 for a voluntary sale, or assuming the gross proceeds figure is what SSA will see. Have your CPA model the actual MAGI before you commit — a CPA review before selling is the single highest-value hour in this process.
Every Alternative Priced Against the IRMAA Cost
Put the surcharge in the comparison rather than treating it as an afterthought. For most households the one-year IRMAA cost of a settlement is in the low thousands of dollars — real money, but usually not decisive against a six-figure transaction. It is decisive when the settlement is marginal to begin with.
Keep paying. No taxable event, no MAGI impact, no IRMAA change. The death benefit generally passes to beneficiaries income-tax-free under section 101(a).
Surrender. Gain above cost basis is ordinary income and counts fully toward MAGI, exactly like the taxable portion of a settlement. Surrendering is not an IRMAA workaround; it usually produces less cash for the same kind of income.
Reduced paid-up. A nonforfeiture election, not a sale. Generally no current taxable event, no MAGI impact, premiums stop, smaller death benefit remains.
Extended term. Also a nonforfeiture election with no current income. Full face amount for a limited number of years.
1035 exchange. Moves cash value into another policy or annuity with no current tax and therefore no IRMAA effect. Solves a product problem, not a cash need.
Accelerated death benefit. Payments to a terminally or chronically ill insured are generally excluded from income under section 101(g) — excluded income is not in MAGI. This is frequently the most IRMAA-efficient way to convert coverage into cash, and it is already in some policies at no extra cost.
Policy loan. A loan against cash value is generally not taxable while the policy stays in force, so it does not affect MAGI. But interest compounds, the loan reduces the death benefit, and if the policy later lapses with a large loan outstanding, the resulting taxable event can be severe and arrives with no cash to pay it.
When a Settlement Is the Wrong Answer
IRMAA rarely decides this on its own, but it belongs in the tally alongside the reasons that do.
A settlement is the wrong answer when a surviving spouse or a disabled adult child still needs the death benefit and the premium is affordable — a tax-free benefit at full face value beats a discounted taxable lump sum in almost every version of that comparison. It is wrong when the net death benefit is under roughly $100,000, where the market generally will not bid at all. It is wrong when the insured is in strong health for their age, which lengthens projected life expectancy and compresses offers toward surrender value; federal research (GAO-10-775) put historical proceeds at roughly 10% to 35% of face, and the low end of that band is where healthy insureds land. It is wrong when an accelerated death benefit rider already in the contract would deliver cash faster, cheaper, and with better tax treatment.
And it is wrong when the household is on the edge of a means-tested program. IRMAA is a surcharge; losing Medicaid or SSI is a different order of harm. SSI counts resources above $2,000 for an individual and $3,000 for a couple, limits unchanged since 1989, and Medicaid eligibility is asset-tested under state rules. See how proceeds affect SSI and whether a settlement affects Social Security benefits. State income tax is a further layer worth checking — state tax on settlement proceeds varies considerably.
To get the policy-side numbers your CPA needs, send the policy cover page for a free, no-obligation review, or call (305) 209-7183. Pine Lake Life Solutions provides educational information only and does not provide legal, tax, or investment advice.
Frequently Asked Questions
Will selling my policy raise my Medicare premium?
It can, but only the taxable portion counts. Proceeds up to your cost basis are generally a return of capital and not income at all. IRMAA is calculated from modified adjusted gross income on the tax return from two years earlier, so a 2026 sale would affect 2028 Part B and Part D premiums.
How much is the surcharge?
It depends on which bracket your MAGI lands in and applies to both Part B and Part D, for each enrolled spouse separately. For reference, the 2025 standard Part B premium was $185.00 and the first tier began above $106,000 single or $212,000 joint. CMS resets these annually; confirm current figures with SSA.
Is IRMAA gradual or a cliff?
A cliff. One dollar of modified adjusted gross income above a threshold moves you into the entire next bracket, for both Part B and Part D. That is why estimating the taxable portion precisely before closing matters so much, and why a small change in the timing or amount can be worth thousands of dollars.
Can I file Form SSA-44 to avoid it?
Almost certainly not for this. SSA-44 covers a closed list of life-changing events: marriage, divorce, death of a spouse, work stoppage or reduction, loss of income-producing property, loss of pension income, and an employer settlement payment. A voluntary sale of an asset is not among them and such a request will be denied.
How long does the higher premium last?
Generally one year. Because IRMAA is recalculated annually from a return two years back, a single-year income spike produces a single year of surcharge and then falls away automatically once the higher-income year rolls out of the lookback. No form is required to make that happen.
Does a viatical settlement affect IRMAA?
Generally not. Proceeds on a policy covering a terminally ill insured, sold to a viatical settlement provider licensed in that state, are generally excluded from income under IRC 101(g)(2). Excluded income is not in adjusted gross income and therefore not in MAGI, so there is no IRMAA consequence.
Would surrendering instead avoid the problem?
No. Gain above cost basis on a surrender is ordinary income and counts toward MAGI in the same way. Surrendering typically produces less cash for the same category of taxable income, so it is not an IRMAA strategy. Nonforfeiture elections such as reduced paid-up produce no current income, but also no cash.
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Related Reading
- Taxes On Life Settlement Proceeds
- Cost Basis Life Insurance Policy
- Timing When To Sell A Policy
- Settlement Proceeds Affect Ssi
- Does A Life Settlement Affect Social Security
- State Income Tax On Settlement
- Life Settlement Tax Basis Explained
- Cpa Review Before Selling
Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.