Q Life Settlements Blog

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March 22, 2023

Difference Between Viatical Settlement and Life Settlement

The terms “life settlement” and “viatical settlement” are sometimes used interchangeably. However, it’s important to understand that while these types of settlements are quite similar, there are also some key differences between them. If you’re of retirement age and have a life insurance policy in your name, knowing the difference between a life settlement and a viatical settlement can help you make the right decisions for yourself and your loved ones later on.

Both viatical settlements and life settlements involve the sale of a life insurance policy from the original life insurance policyholder to a viatical settlement provider or life settlement provider. In the policy sale, the cash payout that the policy owner receives is greater than the cash value (also known as surrender value) in the policy but less than the policy’s death benefit.

Life settlements are also sometimes referred to as life insurance settlements or senior settlements. Life settlement companies and viatical settlement companies facilitate viatical and life settlement transactions. The life settlement companies that you are most likely to interact with are either a life settlement provider or a life settlement broker.

What is a Viatical Settlement?

With a viatical settlement, you sell your life insurance policy to a third-party (such as a viatical settlement provider). You receive a lump sum cash payment from the buyer—and the buyer assumes responsibility for paying your policy premiums while becoming the new policy owner and sole beneficiary of the policy death benefit and payout.

Even more specifically, viatical settlements are typically reserved for people who are terminally or chronically ill. The exact life expectancy for a viatical settlement can vary from one buyer to the next, but is usually around two years or less. The idea is that by selling a life insurance policy in the form of a viatical settlement, those with terminal illnesses can use their lump sum payments to cover costs related to treatment, medical expenses, and other care. Viatical settlements are more based on the health issues than age, so anyone with a terminal or chronic illness may qualify, regardless of age.

Likewise, money received from a viatical settlement typically does not need to be reported as income, so it may be tax-free and not subject to a federal income tax. This makes a viatical settlement an appealing option to those with terminal illnesses who may need cash for long term care and related costs.

What is a Life Settlement?

Life settlements are similar to viatical settlements—but with a couple of important distinctions. With a life settlement, you are still selling your life insurance policy to a third-party and receiving a lump sum payment. In exchange, the buyer assumes payments of your policy premiums while also becoming the sole beneficiary of the policy.

Unlike with a viatical settlement, however, there is no requirement for the policyholder to have a terminal illness or chronic illness in order to sell. In fact, most seniors with life insurance policies can sell their policies regardless of life expectancy. The policy value is based upon age, policy characteristics, and health status in a life settlement.

While many seniors who choose to sell their policies have some health impairments and may use the funds to cover treatment costs or ongoing care and medical expenses, money from a life settlement can be used for anything. As such, however, it is counted towards your income and can thus be taxed. Specifically, life settlements are taxed at three different tiers based on the Tax Cut and Jobs Act of 2017.

Some common reasons for a senior to decide to sell their life insurance policy in a life settlement may include:

    • difficulty affording life insurance policy premiums
    • the life insurance policy is no longer needed
    • money is needed to cover healthcare, long-term care, and/or medical expenses
    • funds are needed to supplement retirement income
    • complete a qualified spend down for Medicaid

Viatical Settlement vs. Life Settlement

Generally, whether you qualify for a viatical settlement or a life settlement depends on your health profile. If you have a terminal illness or chronic illness, generally defined as a life expectancy of two years or less, you would be eligible for a viatical settlement.

A viatical settlement may qualify as tax-free if you meet the criteria and use the proceeds to cover medical expenses. A life settlement does have tax implications, so you should check with your financial advisor or accountant on how your cash settlement will impact you.

Viatical Settlement Transactions and Life Settlement Transactions are Regulated

Both viatical settlements and life settlements are regulated transactions. The regulations are based upon model laws proposed by the National Association of Insurance Commissioners (NAIC). When you enter into a life settlement transaction, you will receive a privacy policy and disclaimer that will outline how your information will be kept safe and what the potential implications of the settlement are.

Do I Qualify For a Life Settlement or Viatical Settlement?

Any type of life insurance policy, including term life insurance and whole life insurance, can qualify for a viatical or life settlement transaction. Generally, you need to have the policy’s face value be $50,000 or higher. Eligibility depends on your life expectancy, policy design, and premium payments. You can get an instant, no obligation estimate of your life insurance policy’s value by visiting our life settlement calculator.

Is a Life Settlement or Viatical Settlement Right for You?

Unless you have a terminal illness, a standard life settlement is generally the best option for seniors looking to sell their life insurance policies for a cash payment. Of course, it is important to understand the potential tax, senior finance, and other implications of selling a life insurance policy before you proceed.

You can also explore other alternatives, including an accelerated death benefit if you have a terminal illness or chronic illness (viatical settlement eligibility). To determine if your life insurance policy has an accelerated death benefit rider, contact your life insurance company or financial advisor.

Interested in Selling Your Policy?

Wondering how much your life insurance policy might be worth? Check out our free life settlement calculator to help you get started. At Q Life Settlements, we’re committed to helping you get the best settlement possible offer for your life insurance policy. Reach out to our knowledgeable and friendly team today – call us at 866-679-9410, email us at info@qlifesettlements.com, or book an appointment to get started; we would be happy to walk you through the process and take the time to answer any questions you have!