My Life Insurance Company has offered me an "Enhanced Cash Surrender Value". The Cash Surrender Value is $50,000, but if I surrender it within the next 90 days, they will pay me $100,000 (twice that CSV). They are trying to get in on the Life Settlement business by beating them to it with a good offer so I don't go out and settle the policy. I know my tax basis in the policy is $40,000.
If I "sold the policy" to a third party for $100,000 I understand that I'd have ordinary income of $10,000 ($50,000 CSV-$40,000 basis) and a Capital Gain of $50,000 (the $100,00 sale price minus the CSV). If I accept the company's identical $100,000 "Enhanced CSV" offer, do I have $60,000 of ordinary income? Or would the increase associated with the Enhanced CSV be treated as a capital gain to give me the same result? Do get a different tax result depending on whether I sell the policy to a third party or back to the original company?
Plus, can I offset any capital gain from this against carried over capital losses from investment activities?
