For New Hampshire residents, taxes on a life settlement are a federal-only question in 2026: the state has no tax on wages, and its interest and dividends tax was fully repealed effective 2025, so the gain from selling a life insurance policy faces federal income tax and nothing from Concord. That makes New Hampshire one of the most tax-friendly states in the country for a policy sale — but the federal rules still deserve careful attention, because they split your proceeds into as many as three tax layers.
Under the post-2017 framework (clarified by IRS Revenue Ruling 2020-05), the money you receive is measured against two markers: the total premiums you paid (your basis) and the policy’s cash surrender value. Amounts up to basis come back tax-free; gain up to the cash surrender value is ordinary income; anything above that is capital gain.
This guide walks through those layers with a worked dollar example, explains the special income-tax-free treatment for terminally ill sellers, and flags where a tax professional should check your specific numbers. It is education, not tax advice.
In This Article
- The Federal Three-Tier Framework
- A Worked Example in Dollars
- Why New Hampshire Adds Nothing at the State Level
- Viatical Settlements: The Terminal-Illness Exception
- Settlement vs. Surrender: The After-Tax Comparison
- Taxes Are Not the Only Interaction: Medicaid
- Paperwork, Reporting, and Getting Real Numbers
- Frequently Asked Questions
The Federal Three-Tier Framework
Since the Tax Cuts and Jobs Act simplified basis rules, the IRS treats a life settlement in three tiers, confirmed in Revenue Ruling 2020-05:
- Tier 1 — Return of basis (tax-free). Proceeds up to the total premiums you paid over the life of the policy come back to you with no tax. Importantly, post-TCJA you no longer reduce basis by the cost of insurance charges — total premiums paid is the working number.
- Tier 2 — Ordinary income. The slice between your basis and the policy’s cash surrender value is taxed as ordinary income, the same rates as wages.
- Tier 3 — Capital gain. Everything the buyer pays above the cash surrender value is capital gain — long-term if you have held the policy more than a year, which is nearly always the case for settled policies.
Your insurer can give you the two inputs: a premium history (basis) and a current cash surrender value statement. Get both in writing before you evaluate any offer.
A Worked Example in Dollars
Suppose a Nashua retiree sells a universal life policy in 2026 on these facts:
- Total premiums paid over the years (basis): $60,000
- Cash surrender value at sale: $75,000
- Settlement price: $140,000
The federal treatment splits the $140,000 like this:
- $60,000 — return of basis, no tax
- $15,000 ($75,000 CSV minus $60,000 basis) — ordinary income
- $65,000 ($140,000 price minus $75,000 CSV) — long-term capital gain
Even after federal tax, the seller keeps far more than the $75,000 surrender alternative would have paid — and in New Hampshire, no state return takes a second bite. Your numbers will differ; a tax professional should run them before you close.
Why New Hampshire Adds Nothing at the State Level
New Hampshire has never taxed wages, and for decades its only broad personal income tax was the interest and dividends tax. That tax was phased down and fully repealed effective 2025, so as of 2026 there is no New Hampshire personal income tax that reaches settlement gains — neither the ordinary-income slice nor the capital-gain slice. Confirm the characterization of your specific gain with a tax professional, since state treatment of unusual income items is exactly the kind of detail worth a professional’s sign-off, but the baseline is simple: for a New Hampshire resident, the settlement tax bill is the federal bill.
Compare that with a state like neighboring Massachusetts or, further south, New Jersey, where the gain portion is taxed again at state rates. Residency at the time of sale is what matters — a fact worth noting for retirees who split the year between states.
| Layer of Proceeds | Federal Tax Treatment (2026) | New Hampshire Tax |
|---|---|---|
| Up to total premiums paid (basis) | Tax-free return of basis | None |
| Basis up to cash surrender value | Ordinary income | None — no NH personal income tax; I&D tax repealed effective 2025 |
| Above cash surrender value | Capital gain (long-term if held over 1 year) | None |
| Viatical sale (life expectancy under 24 months) | Generally income-tax-free under IRC Sec. 101(g) | None |
| Surrender instead of sale | Amount above basis is ordinary income | None |
Viatical Settlements: The Terminal-Illness Exception
Federal law carves out a major exception for the seriously ill. Under Internal Revenue Code Section 101(g), when the insured is terminally ill — generally certified by a physician as having a life expectancy of 24 months or less — the sale of the policy to a licensed viatical settlement provider is treated like a death benefit paid early, and the proceeds are generally free of federal income tax entirely. A parallel rule can apply for chronically ill insureds when proceeds are used for qualified long-term-care costs, subject to additional conditions.
The certification and the buyer’s licensing status both matter to qualifying, so if illness is part of your situation, make sure the transaction is structured as a viatical settlement and have a tax professional confirm the exclusion applies before you rely on it.
Settlement vs. Surrender: The After-Tax Comparison
Taxes should be compared on both sides of the decision. Surrendering to the insurer is also taxable — any surrender value above your basis is ordinary income. In the example above, surrendering for $75,000 would generate $15,000 of ordinary income and leave the seller with far less total cash than the settlement, even after the settlement’s larger tax bill. The federal GAO’s market study (GAO-10-775) found settlements typically paid 10% to 35% of face value, roughly 4 to 8 times surrender value on average — a gap taxes rarely close.
Our side-by-side guide to a life settlement vs. surrender works through the comparison in detail, and what policies qualify covers whether your policy is a candidate at all.
Taxes Are Not the Only Interaction: Medicaid
For families selling a policy to fund long-term care, the Medicaid rules matter as much as the tax rules. Settlement proceeds are countable assets the moment they arrive, so timing the sale against a Medicaid application takes planning — the proceeds are typically spent down on care before eligibility begins. The good news: selling at fair market value is not a gift, so it does not trigger the five-year lookback penalty. Our guide to New Hampshire’s Medicaid asset and income limits lays out the 2026 numbers, and an elder law attorney can sequence the steps for your family.
Paperwork, Reporting, and Getting Real Numbers
Expect tax forms after a settlement: the buyer files Form 1099-LS reporting the sale, and your insurer may issue Form 1099-SB showing your basis, both introduced by the 2017 tax law’s reporting regime. Keep your premium history, the purchase agreement, and the closing statement together for your preparer.
Before any of that, the practical first step is finding out what your policy is actually worth. A free policy review — just the cover page showing insurer, policy number, face amount, and issue date — tells you whether the tax question is even worth asking. Call (305) 209-7183 or browse the Education Center. For how the transaction itself is regulated in the state, see New Hampshire’s life settlement licensing rules.
Frequently Asked Questions
Does New Hampshire tax life settlement proceeds?
No state income tax applies as of 2026. New Hampshire has never taxed wages, and its interest and dividends tax was fully repealed effective 2025. A New Hampshire resident’s settlement tax bill is the federal bill only — though you should confirm your specific gain characterization with a tax professional.
How does the IRS tax a life settlement in 2026?
In three tiers, per Revenue Ruling 2020-05. Proceeds up to your total premiums paid are tax-free. The slice between your basis and the policy’s cash surrender value is ordinary income. Anything above the cash surrender value is capital gain, usually long-term.
What counts as my basis in the policy?
Generally the total premiums you have paid over the life of the policy. Since the 2017 tax law, you no longer subtract the cost-of-insurance charges from that figure for a sale. Ask your insurer for a written premium history so your preparer has the exact number.
Are viatical settlements taxed the same way?
No. If the insured is terminally ill — generally a certified life expectancy of 24 months or less — a sale to a licensed viatical settlement provider is generally free of federal income tax under IRC Section 101(g). Similar treatment can apply for chronic illness when proceeds pay for long-term care, with extra conditions.
Is surrendering my policy tax-free?
Not necessarily. Any surrender value above your total premiums paid is ordinary income. Because settlements typically pay several times surrender value, comparing the two options after tax usually still favors the settlement for qualifying policies — but run both numbers with a tax professional.
What tax forms will I receive after selling my policy?
The buyer files Form 1099-LS reporting the acquisition, and your insurance company may issue Form 1099-SB showing your basis. Keep both with your premium history and closing statement, and give the full package to your tax preparer for the year of sale.
Do settlement proceeds affect Medicaid in New Hampshire?
Yes — the proceeds are a countable asset once received, so they generally must be spent down on care before Medicaid eligibility begins. Selling at fair market value is not a gift, so it does not create a lookback penalty. An elder law attorney can help sequence a sale and an application correctly.
Find out what your policy is worth — free, confidential, no obligation.
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Related Reading
- Life Settlement Vs Surrender
- Cash Surrender Value Life Insurance
- What Policies Qualify For Life Settlement
- Life Settlement Licensing New Hampshire
- New Hampshire Medicaid Asset Income Limits
- Education Center
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.