A viatical settlement gives individuals with a terminal or chronic illness the opportunity to sell their life insurance policy in return for an immediate cash payment. It offers a practical way to access funds that can ease financial burdens. Knowing how a viatical settlement works helps policyholders make thoughtful choices about their finances and maintain a better quality of life during difficult times.
What Is a Viatical Settlement
A viatical life settlement allows a policyholder to transfer ownership of their life insurance to an outside buyer for an upfront cash payment. The amount received is typically less than the policy’s full death benefit but greater than its surrender value. Once the transaction is complete, the buyer takes over premium payments and later claims the death benefit when the insured person dies.
This arrangement gives the policyholder quick access to money that can be used for any purpose, such as medical treatment or personal needs. It is often an option for individuals diagnosed with a terminal or severe chronic illness and who are expected to live for about two years or less.
How a Viatical Settlement Works
The process begins when the policy owner, also called the viator, decides to sell their life insurance policy. They contact a licensed viatical settlement provider to request an offer. The provider reviews the policy’s value, verifies medical information, and evaluates the viator’s life expectancy. Once both parties agree, the viator receives a lump sum payment, often ranging between 50% and 70% of the policy’s face value.
Once the policy is sold, the buyer takes over paying the remaining premiums and becomes the sole beneficiary. The original policyholder, known as the “viator,” gives up ownership and control of the policy in exchange for immediate funds. This money can be used to cover medical bills, handle living expenses, or support meaningful goals during their remaining time.
Purpose of a Viatical Settlement
The primary goal of a viatical settlement is to give individuals with serious health conditions immediate financial support and greater control over their money. It can be a lifeline for those who need funds to pay for treatment, long-term care, or to settle debts. Some use the payout to improve their comfort and quality of life, allowing them to focus on their health and loved ones instead of financial pressure.
A viatical settlement can also help preserve other assets, such as a home or savings. For many people, it offers a chance to use the worth of their life insurance during their lifetime, when the funds can still make a difference.
Who Qualifies for a Viatical Settlement
Viatical settlements are designed for people diagnosed with a terminal or chronic illness and a life expectancy of about two years or less. Eligible policies often include whole life, universal life, or term life insurance that can be converted. The cash amount a person receives varies based on their health condition, age, and the specific terms of their policy.
Viatical Settlement vs. Life Settlement
Although both options involve selling a life insurance policy, a viatical settlement differs from a life settlement in key ways. A viatical settlement applies to those with serious health conditions and shorter life expectancy. Life settlements, on the other hand, are generally for healthy seniors aged 65 or older.
Viatical settlements usually offer a higher insurance payout, often between 50% and 85% of the policy’s death benefit, compared to life settlements, which typically pay 10% to 25%. Another major difference is taxation. Viatical settlements are generally not taxable when the insured is terminally or chronically ill, whereas life settlements are typically taxed as income.
Tax Considerations and Licensing
Most viatical settlements are tax-free because they are treated as an advance of the death benefit. For this to apply, the settlement provider must be licensed to purchase life insurance policies in the seller’s state and must regularly buy policies from individuals with serious illnesses.
If the insured is terminally ill, the payment is generally tax-free regardless of how it is used. For chronically ill individuals, the proceeds are tax-free if used for out-of-pocket medical or long-term care expenses. Since tax laws vary between states, consulting a tax professional is important before finalizing any agreement.
Most states also regulate viatical settlement providers through their insurance commissions. These agencies ensure companies meet specific requirements to protect consumers. The National Association of Insurance Commissioners provides a directory to verify licensed providers.
Things to Consider Before Selling
Selling a life insurance policy is a serious step that requires careful thought. Before moving forward, policyholders should review their financial needs and consider all available options. Getting quotes from different settlement companies helps ensure a fair and competitive offer.
It’s also wise to verify that the settlement company uses an independent escrow account to securely manage the transaction. Sellers should understand how their medical details will be handled, as buyers may request health updates after the sale.
Those receiving government assistance should check how a lump-sum payment could affect eligibility for programs such as Medicaid or SNAP. If parting with the policy feels too permanent, there are alternatives. Some life insurance policies include an accelerated death benefit rider. This allows access to a portion of the death benefit while keeping the rest for beneficiaries. Another option is taking out a loan against the policy’s cash value to receive funds without giving up ownership.
A Decision That Prioritizes Comfort and Dignity
A viatical settlement gives individuals control over their financial resources during a challenging time. It allows them to use the value of their life insurance policy to improve comfort, security, and peace of mind.
While it involves giving up the death benefit loved ones would have received, it can provide immediate stability and independence. Consulting a licensed provider and an experienced financial or tax advisor can help ensure the choice aligns with needs.