Viatical Settlement vs. Life Settlement

Your life insurance needs may change over time. If you require funds to use now, you might choose to sell your policy in a transaction called a life settlement or viatical settlement. Though similar, these terms are not interchangeable. Let’s explore what they mean.

Terry Turner, writer and researcher for RetireGuide
  • Written by
    Terry Turner

    Terry Turner

    Senior Financial Writer and Financial Wellness Facilitator

    Terry Turner has more than 30 years of journalism experience, including covering benefits, spending and congressional action on federal programs such as Social Security and Medicare. He is a Certified Financial Wellness Facilitator through the National Wellness Institute and the Foundation for Financial Wellness and a member of the Association for Financial Counseling & Planning Education (AFCPE®).

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  • Edited By
    Savannah Hanson
    Savannah Hanson, financial editor for RetireGuide

    Savannah Hanson

    Senior Financial Editor

    Savannah Hanson is a professional writer and content editor with over 16 years of professional experience across multiple industries. She has ghostwritten for entrepreneurs and industry leaders and been published in mediums such as The Huffington Post, Southern Living and Interior Appeal Magazine.

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  • Reviewed By
    Ebony J. Howard, CPA
    Ebony J. Howard, CPA

    Ebony J. Howard, CPA

    Credentialed Tax Expert at Intuit

    Ebony J. Howard is a certified public accountant and freelance consultant with a background in accounting, personal finance, and income tax planning and preparation.  She specializes in analyzing financial information in the health care, banking and real estate sectors.

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  • Published: November 18, 2022
  • Updated: November 22, 2022
  • 5 min read time
  • This page features 5 Cited Research Articles
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APA Turner, T. (2022, November 22). Viatical Settlement vs. Life Settlement. RetireGuide.com. Retrieved December 7, 2022, from https://www.retireguide.com/life-insurance/viatical-settlement/viatical-vs-life/

MLA Turner, Terry. "Viatical Settlement vs. Life Settlement." RetireGuide.com, 22 Nov 2022, https://www.retireguide.com/life-insurance/viatical-settlement/viatical-vs-life/.

Chicago Turner, Terry. "Viatical Settlement vs. Life Settlement." RetireGuide.com. Last modified November 22, 2022. https://www.retireguide.com/life-insurance/viatical-settlement/viatical-vs-life/.

Key Takeaways
  • Life insurance is an asset: you can sell it for a viatical or life settlement.
  • In a viatical settlement, the seller is terminally or chronically ill.
  • In a life settlement, the seller is generally in good health and over 65.
  • There are important tax differences between life and viatical settlements.

Comparing Viatical Settlements and Life Insurance Settlements

Although life insurance provides financial security for your loved ones after your death, your policy is also an asset now — you can sell it to a third party if you are looking for money in the present. If you are terminally or chronically ill, that transaction is called a viatical settlement. If you are in good health, it is called a life settlement.

In both cases, the lump-sum payment you receive will be less than the full value of your policy’s death benefit, but more than you would have received from surrendering it back to your policy provider. The third-party buyer will pay any premiums in the future and collect the full death benefit when the insured dies.

Most states regulate life and viatical settlements. The National Association of Insurance Commissioners and the National Conference of Insurance Legislators have each created model acts to serve as the basis for state legislation.

The lump sum received in a viatical settlement is considered an advance payment of the death benefit and is, therefore, tax-free according to the IRS. Life settlements, however, are not considered death benefits but capital gains and/or ordinary income and are subject to taxation.

Shared Similarities Between Viatical and Life Settlements

Since they both concern the sale of your life insurance policy, viatical and life settlements have many aspects in common.

Similarities
Lump-Sum Payouts
In both viatical and life settlements, you receive a lump-sum payment to use at your discretion.
Third-Party Buyers
In both transactions, you don’t surrender your policy back to your life insurance provider. Instead, you sell your life insurance policy to a third-party buyer in a regulated financial transaction.
Premium Payments
In either case, the buyer pays any premiums going forward and ultimately collects the full death benefit.
Payment Amounts
In both instances, you will receive less than the full amount of the death benefit, but more than the cash surrender value. The exact amount you receive will depend on many factors (the type and value of your policy; your health and life expectancy; cost of premiums, etc.).

Notable Differences Between Viatical and Life Settlements

There are also important differences between viatical and life settlements.

Differences
Medical Requirements
Health is the major differentiator between viatical and life settlements. In a viatical settlement the seller, or viator, must be either terminally ill (with a life expectancy of 24 months or less) or chronically ill (unable to perform daily activities like eating or bathing without assistance). If neither of those two conditions are present, the transaction is a life settlement.
Age Requirements
There is no age requirement in viatical settlements, but most life settlements require the policy seller to be at least 65 years old.
Taxation
The tax implications for viatical settlements are distinctly different from those for life settlements. A tax advisor can help explain the specifics of your case.

Viatical and Life Settlement Taxation

For federal taxation, the lump sum received in a viatical settlement is considered an advance payment of the death benefit and is, therefore, tax free according to the IRS.

Life settlements, however, are not considered death benefits but capital gains and/or ordinary income and are subject to taxation. Since the Tax Cuts and Jobs Act of 2017, life settlements are taxed on the same basis as surrendered policies.

States also have their own taxation rules, which will vary depending on where you live. Speak to a trusted tax advisor about the financial implications when considering either a viatical or life settlement.

The Sales Process for Viatical and Life Settlements

The sales process for viatical and life settlements is very similar. In both cases, you’ll want to work with a reputable life or viatical settlement company or broker.

When you apply for either settlement, you’ll be required to disclose sensitive health and financial information. The company will verify that information and appraise your particular circumstances before making a purchase offer. If you accept, you’ll typically receive the payout in a matter of weeks.

In both settlements, you will receive more than the cash surrender value of your policy, but less than the ultimate face value. You’ll typically receive between 50-70% of the total death benefit, though the exact amount will depend on the details of your circumstances. Your age, health, policy value and premiums all play a role in determining the exact percentage or dollar amount.

Is Selling Your Viatical or Life Settlement a Good Idea?

There are several reasons you might consider a viatical or life settlement, and ultimately it’s up to you to determine whether the settlement is a good idea for you.

A viatical settlement might offer the money you need to pay for treatment or living expenses. Or you might use the money for travel, to pay off a mortgage or simply to enjoy the time you have left with friends and family. With a life settlement, you may no longer need to leave money for your beneficiaries or you might wish to stop paying your premiums.

In any case, selling your life insurance policy is a sensitive and significant decision and one that is not suitable for every person or situation. Discuss all the financial and emotional ramifications with your beneficiaries and a trusted financial advisor if you need help to decide.

Last Modified: November 22, 2022

5 Cited Research Articles

  1. Weinberger, R., & Katz, P. (2018, February 21). How the New TCJA Tax Law Affects Life Settlements. Retrieved from https://blog.lisa.org/advisor/how-the-new-tcja-tax-law-affects-life-settlements
  2. Life Insurance Settlement Association. (n.d.). Frequently Asked Questions – Life Policy Owners. Retrieved from https://www.lisa.org/life-policy-owners/faq
  3. National Association of Insurance Commissioners. (n.d.). Viatical Settlements Model Act. Retrieved from https://content.naic.org/sites/default/files/MO697.pdf
  4. National Conference of Insurance Legislators. (n.d.) National Conference of Insurance Legislators Life Settlements Model Act. Retrieved from https://ncoil.org/wp-content/uploads/2016/04/AdoptedLifeSettlementsModel.pdf
  5. U.S. Internal Revenue Service. (n.d.). Information Reporting for Certain Life Insurance Contract Transactions and a Modification to the Transfer for Valuable Consideration Rules. Retrieved from https://www.irs.gov/pub/irs-drop/n-18-41.pdf