January 13, 2022
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.
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 payment from the buyer—and the buyer assumes responsibility for paying your policy premiums while becoming the sole beneficiary of the policy benefits.
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 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 is 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 be terminally ill 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 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 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 on 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 expenses
- funds are needed to supplement retirement income
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 cash. Of course, it is important to understand the potential tax, senior finance, and other implications of selling a life insurance policy before you proceed.
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 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!