What Are Viatical Settlements?

What Happens Under a Viatical Settlement

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What are Viatical Settlements?

Most people purchase a life insurance policy because they want their loved ones to receive the policy’s death benefit after they pass away. But if the insurer has a terminal illness or a chronic illness, then they can use their life insurance policy to pay for medical expenses. Instead of letting their insurance lapse or going into debt because of medical bills,  the policyholder can opt for a viatical settlement in exchange for their life insurance policy. 

Viatical Settlement: What is It?

When a policyholder has been diagnosed with a terminal illness or a chronic illness, they can sell their life insurance policy for a cash payment. The lump sum of cash that the policy owner receives is called a viatical settlement. Usually, the policy owner sells their policy to a third party and may take the help of a viatical settlement provider to find prospective buyers. The proceeds from the settlement can be used towards medical expenses, long-term care costs, or nursing home bills. 

To qualify for a viatical settlement, the insured person has to meet one of the following eligibility requirements:

  • Have a terminal illness and a life expectancy of less than 24 months.

  • Have a chronic illness and is unable to perform two or more activities of daily living, including eating, dressing, bathing, or toileting.

For a life insurance policy to be eligible for a viatical settlement, it needs to meet the following parameters:

  • The life insurance policy should be older than two years.

  • The face value of the policy should be at least $100,000.

  • The policy should be a permanent life insurance policy (universal life policy or whole life policy). If the policy is a term policy, then it needs to be converted into a permanent one before the policy can be sold for a viatical settlement. 

While the settlement process can be facilitated by a life settlement broker or a life settlement provider, the settlement amount that the policyholder receives will depend on the health status of the policy owner, the premium amount, and whether there are any outstanding loans against the policy. 

Viatical Settlement vs. Life Settlement

Viatical Settlements vs. Life Settlements

While life settlements and viatical settlements involve the sale of a life insurance policy for an upfront

amount of cash, there are certain key differences between them:

  • A policyholder qualifies for a life settlement if they are over the age of 65 – they do not have to be ill to receive it.  

  • The purchase value of viatical settlements is higher than life settlements because the insured has a short life expectancy.

Taxation of Viatical Settlements

Viatical settlements are not subject to federal taxes in most instances. When the policyholder is terminally ill and has a life expectancy of less than two years, then the viatical settlement is treated the same as the death benefits that a loved one will receive when the insured person passes away. 

When the settlement is for a chronic illness, there will be no taxes if the proceeds from the settlement are used for long-term care expenses. But if the payout is used for other expenses, then they can be taxed. 

Viatical Settlement Providers

Taking the help of a viatical settlement provider can be beneficial for the policyholder. A provider will have access to potential buyers and can get more offers or better offers for your policy. If you are considering using the services of a viatical settlement company, you should consider the following points before making a decision:

  • Services they offer.

  • Fees they charge.

  • Their requirements when it comes to life insurance policies.

  • Policies about confidentiality. 

  • How long they have been in business.

  • Successful transactions they have made.

A reputable viatical settlement provider will make sure that the policyholder’s concerns are addressed, and that they have their questions answered .

When to Consider a Viatical Settlement

People most often opt for a viatical settlement when they need to pay for medical expenses, long-term care expenses, or end-of-life expenses. But there are several other reasons why the insured chooses a viatical settlement in exchange for their life insurance policy:

  • They don’t want to pay the premiums – If the policyholder no longer wants to make premium payments to the life insurance company, and qualifies for a viatical settlement, then selling their policy could be the best course of action for them. Once they sell their policy, the new owner becomes responsible for the premium payments. 

  • Their loved ones or beneficiaries don’t require the death benefit – If the beneficiaries or loved ones of the policyholder no longer need the death benefit from the policy, then selling the insurance policy for a cash payout can help pay the medical expenses of the insured. 

  • Their term life insurance policy is going to expire – Once a term policy expires, then the policyholder does not receive anything for the policy. A term policy cannot be sold for a viatical settlement, but if they have a conversion rider, then they can be converted into a permanent life policy and then sold. If a policyholder has a term policy, selling the policy for a fixed amount of cash is a better alternative to the policy lapsing. 

They want the funds for other expenses – While viatical settlements are usually meant for medical expenses or long-term care expenses, the payout can be used for other purposes. Using the payout for other debts or expenses can lead to taxation of the settlement – but after taxes, the rest of the proceeds can be used to pay for other things.

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FAQ On Viatical Life Settlements

Who pays the insurance premiums once the life insurance policy is sold?

Once a policyholder sells their policy, the responsibility of future premium payments will fall on the new owner. They will also receive your death benefits once you pass away. 


Can a person with no terminal illnesses receive a viatical settlement?

No, only terminally ill people or chronically ill people qualify for a viatical settlement. If you want to sell your life insurance policy and are over the age of 65, you can qualify for a life settlement instead. 

Do viatical settlement providers charge a fee to check if I qualify?

No, any reputable viatical settlement provider should offer a free consultation regarding your particular circumstances.

Don’t lose your lifelong investment. Discover your policy’s value today.