Viatical Settlement vs. Life Settlement

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.

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

There are also important differences between viatical and life settlements.

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 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.

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.