Life Settlement vs Viatical Settlement What is the difference
If you’re considering selling your life insurance policy, you may have come across terms like “life settlement” and “viatical settlement.” While both options allow policyholders to convert their insurance into cash, they cater to different needs and situations. Knowing the differences can help you make the right decision for your circumstances.
Life Settlements vs. Viatical Settlements: Comparison Table
| Criteria | Life Settlement | Viatical Settlement |
|---|---|---|
Primary Eligibility |
Seniors (65+) with longer life expectancy |
Terminally ill individuals (short expectancy) |
Payout Amount |
Moderate |
High |
Tax Implications |
Taxable above premiums and surrender value |
Typically tax-free |
Regulation |
Heavily regulated |
Regulated, but varies by state |
Policy Type |
Permanent or convertible term |
Permanent or convertible term |
Purpose |
Financial flexibility in retirement |
Urgent financial relief |
What Is a Life Settlement?
A life settlement is the sale of a life insurance policy to a third party for a cash payment. The buyer assumes responsibility for future premium payments and receives the policy’s death benefit when the insured passes away.
Key Things to Understand as a Policy Owner:
Who Qualifies?
- Typically, individuals aged 65+, or younger if major health issues.
- Those with a life expectancy <18 years, determined through underwriting.
Why Choose a Life Settlement?
- To stop paying premiums on an unwanted or unaffordable policy.
- To access funds for retirement, medical expenses, or other needs.
- To gain value from a policy you no longer need before it lapses.
Tax Implications?
- Proceeds exceeding the total premiums paid and the policy’s cash surrender value may be taxed. Consult a tax advisor for specifics.
What Is a Viatical Settlement?
A viatical settlement allows terminally ill individuals to sell their life insurance policies for immediate financial relief. Buyers specialize in purchasing these policies and assume responsibility for future premium payments, just as in a life settlement.
Key Things to Understand as a Policy Owner:
Who Qualifies?
- Individuals diagnosed with terminal illnesses.
- Short life expectancy (usually less than 24 months).
Why Choose a Viatical Settlement?
- To access funds for medical bills, caregiving, or other urgent needs.
- For financial relief during a challenging time.
Tax Implications?
- Proceeds are generally tax-free for individuals who meet the IRS definition of "terminally ill."
Key Differences Between Life Settlement and Viatical Settlement
Health Status of the Policyholder
- Life settlements are ideal for seniors in relatively good health with longer life expectancies.
- Viatical settlements are intended for individuals with terminal illnesses or significantly reduced life expectancy.
Age Requirements
- Life settlements typically require policyholders to be 65 or older.
- Age is less critical for viatical settlements, as health is the primary factor.
Payout Amounts
- Viatical settlements often provide higher payouts due to shorter life expectancy.
- Life settlements yield lower payouts but still provide significant financial benefits.
Tax Implications
- Life settlement proceeds above premiums and the cash surrender value are taxable.
- Viatical settlement proceeds are often tax-free for terminally ill individuals.
Policy Types Eligible
- Both life settlements and viatical settlements accept permanent policies and some convertible term policies.
- Viatical settlements may accept a wider range of policies due to the immediate nature of payouts.
Regulatory Differences
- Life settlements are heavily regulated, with strict licensing requirements for brokers and providers.
- Viatical settlements have similar regulations but vary more by state.
Pros and Cons of Life Settlement
Advantages
- Immediate cash for an unwanted or unaffordable policy.
- Eliminates ongoing premium payments.
- Provides more value than surrendering or lapsing the policy.
Disadvantages
- Proceeds may be subject to taxes.
- Loss of death benefit for beneficiaries (same as if a policy was lapsed).
- Offers are lower than the policy’s full death benefit.
Pros and Cons of Viatical Settlement
Advantages
- Immediate funds for urgent financial needs.
- Proceeds are generally tax-free.
- Provides financial relief during a challenging time.
Disadvantages
- Beneficiaries lose the death benefit.
How to Decide Between a Life Settlement and a Viatical Settlement
Evaluate Your Needs and Goals
- If you’re healthy but need cash for retirement or medical costs, a life settlement may be the right choice.
- If you’re terminally ill, a viatical settlement provides immediate financial relief.
Consider Your Policy Type
- Check eligibility based on the type and value of your policy.
Seek Professional Advice
- Consult with a financial advisor or life settlement expert to understand the implications and maximize your value.
Frequently Asked Questions
Life settlements typically take 6–12 weeks, while viatical settlements may be quicker due to urgency.
Yes, if the insured meets the IRS definition of terminally ill.
Convertible term policies can often qualify for a life settlement and even non-convertible term policies may qualify for a viatical settlement.
No, you are under no obligation to sell your policy. You can decline offers if they don’t meet your expectations.
No, the company you work with will cover all the expenses involved in gathering requirements and going through the process.
Yes, partial life settlements allow you to sell a portion of your policy while retaining some coverage.
Conclusion
Selling your life insurance policy can unlock valuable financial resources when done thoughtfully. By avoiding common mistakes and working with trusted professionals, you can maximize your policy’s value while making an informed decision.
Ready to get started?
Use our Life Settlement Calculator to see what your policy is worth or schedule a call with one of our experts today.
