Long-Term Care Insurance -- Insurer in Liquidation -- Allowing Policyholders to Surrender Policy for Cash -- Tax Treatment of Liquidation Proceeds?

[rocknrolls2]

Individual A purchased a long-term care insurance contract from Insurance Company X in the 1990s.  X is currently in liquidation proceedings.  X is offering its long-term care insurance policyholders three options: (1) retain the same benefits at a substantially higher monthly premium; (2) continue with a policy providing for reduced benefits at a slightly higher premium; or (3) surrender the policy and receive cash in a single sum.  The amount of the lump sum payment greatly exceeds the total amount of premiums that A has paid on the contract.  Assume that A elects option (3) and receives cash.  What are the tax consequences of the cash to A?

[My 2 cents]

Not a tax expert, but if someone surrenders a normal cash value life insurance policy for more than the sum of the premiums, wouldn't the excess be a taxable gain?  Why would it be different for a long-term care policy being surrendered for cash?

Company X is in process of liquidation and they are offering money (whose money?) to their long term care policyholders in excess of the premiums received?  Really?

[ESOP Guy]

2 hours ago, My 2 cents said:

 

Company X is in process of liquidation and they are offering money (whose money?) to their long term care policyholders in excess of the premiums received?  Really?

Can't help with original question but had the same thought.  Given the other two options it seems like a way to get out from poorly written policies they have decided in the long run will cost too much vs premiums being paid.  The other two options pretty much put more money into whoever is taking over the polices pocket.