Viatical Settlement Guide and Calculator

What is a Viatical Settlement?

A viatical settlement is an arrangement in which an individual who is chronically or terminally ill sells their life insurance policy at a discount from its face value for ready cash. In exchange for the cash, the seller of the life insurance policy relinquishes the right to leave the policy’s death settlement to the beneficiary of their choice.

The buyer of the viatical settlement offers the seller a lump sum cash settlement and continues to pay all the premiums left on the insurance policy. The purchaser becomes the sole beneficiary and cashes the full amount of the policy when the original owner dies.

You can use the cash settlements from a viatical settlement however you wish. Typically,  viatical settlements are used to settle final and healthcare expenses.

What is the Primary Feature of a Viatical Settlement?

Fundamentally, it is the prepayment of a death settlement at a reduced rate. However, it is essential to note that the cash settlement is provided in exchange for the transfer and sale of the ownership rights of the life insurance policy.

Practically, the settlement provider takes over the ownership of the life insurance policy and eventually receives the death benefit.

To qualify for a viatical settlement, the policyholder must agree to share certain personal and medical records with the prospective investors. The information may include prescription records and any treatment records, the policy holder’s identity, or a response to a medical history questionnaire or interview.

When the broker ascertains that the viatical settlement is the best option for their client, the next step is for the broker to contact the insurance provider to confirm the authenticity of the information provided. The policy holder’s doctor then provides a signed statement indicating that the seller is of sound mind and not being pressured to sell the policy.

Once the paperwork is done, the viatical provider then pays the settlement proceeds into an escrow account during the transfer process. The escrow account is held by a neutral third party who makes sure that the seller receives the funds he or she is promised and to make sure that the buyer receives the policy.

The funds that the policyholder gets can be utilized for anything the insured desires. However, this transaction means that the insured relinquishes all the rights to their life insurance policy. As such, the policy holder’s beneficiaries will not receive any financial settlements if the insured died. This means that the insurance holder is no longer responsible for paying the monthly premiums or any other maintenance costs related to the insurance policy.

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What is the Name Given to the Policyholder who Enters into a Viatical Settlement Contract?

A viator is the owner of an insurance policy who seeks or enters into to enter into a viatical settlement contract.  A viator is the owner of a life insurance policy insuring the life of an individual who has a life threatening or catastrophic illness or condition.

The viator enters into an agreement under which the viatical settlements company will pay anything of value or compensations. The compensation is less than the expected death benefit of the insurance policy. In return, for the viator’s assignment, sale, transfer, or bequest of the death benefit or ownership of the insurance policy of the viatical settlement company.

A viator may also include an individual insured under a group life insurance policy who is not prohibited from assigning his or her benefits or rights and who assigns those benefits or rights by a viatical settlement.

What is the Difference Between a Life Settlement and a Viatical Settlement?

The difference between a life settlement and a viatical settlement has to do with the life expectancy of the insured. In a life settlement, the insured is normally elderly, aged over 65 years old with a life expectancy of five years or more. In a viatical settlement, the insured is a terminally ill patient of any age whose life expectancy is less than five years.

Viatical Settlement Taxation - When is it Taxable?

Terminally Ill

Viatical settlement payouts are federal income tax-free if the policyholder is terminally ill and a physician has certified a life expectancy of fewer than two years. The payout is considered an advance of the life insurance benefit

Chronically Ill

Viatical settlements are federal income-tax-free when the proceeds are utilized to cover out-of-pocket chronic long-term care expenses. Expenses not covered by Medicare, Medicaid, long-term-care insurance, or health insurance. To be considered long-term care expenses the insured must be unable to perform two or more activities of daily living, also known as ADLs. The ADLs are bathing, dressing, eating, transferring (such as from a wheelchair to a bed), toileting, and continence.

The policyholder must also sell the insurance policy to a licensed life settlement provider. The purchaser should be a regular buyer of life insurance policies and should abide by specific requirements governing the Viatical Settlement Model Act.

State tax law is different than Federal income tax law. Some states adhere to different requirements, but most states follow the federal taxation guidelines on viatical settlements.

What is a Viatical Settlement Broker?

A viatical settlement broker or viatical broker is a licensed professional or firm who, in exchange for a commission or a fee, negotiates viatical settlement contracts between the viatical provider and the owner of an insurance policy. To offer these services, viatical settlement brokers must meet the licensing criteria in most states.

Who does a Viatical Settlement Broker Represent?

A viatical broker represents an individual with an insurance policy looking to obtain a viatical settlement. They negotiate the insured’s policy to a network of licensed providers in order to get offers or bids on behalf of their clients.

What a Viatical Settlement Broker May Not Do?

The work of a viatical settlement broker is to work with many viatical providers to help you navigate the process, but they cannot sell or buy any policy to an investor. Technically, only a licensed viatical provider can purchase or sell a viatical.

What is a Viatical Settlement Provider?

A viatical settlement provider, also called a viatical provider, is a licensed third-party organization or individual who bids and purchases life insurance policies. The viatical provider may sell benefits and ownership rights to investors.

Conclusion

Viatical settlements may be the appropriate choice for the chronically ill or terminally ill policyholders. The fundamental function of life insurance is to provide financial support to one’s beneficiaries, and in lots of situations, that purpose is still paramount. However, in some cases, the death benefit may no longer be important, and immediate concerns may be more important. Thus, opting for a viatical settlement can be reasonable.

Can you sell your term life insurance policy for cash?

Insurancy is here to help you get insured. But when that insurance loses its usefulness, we can help you turn it into cash. We’ll help you find out if your policy qualifies, and we’ll make sure you get the most cash possible if you decide to sell.

Frequently Asked Questions

What is a viatical settlement?

A viatical settlement is a transaction in which a chronically or terminally ill life insurance policyholder sells their life insurance policy to a third-party investor for a lump-sum cash payment that is less than the death benefit but more than the cash surrender value. The buyer becomes the new owner and beneficiary, continues paying premiums, and collects the full death benefit when the insured dies. Viatical settlements emerged in the 1980s during the AIDS epidemic and have since expanded to other terminal and chronic illnesses.

How does a viatical settlement differ from a life settlement?

Both involve selling a life insurance policy to a third party for cash. The difference is the seller's health: a viatical settlement applies to chronically or terminally ill insureds (life expectancy typically under 24 months), while a life settlement applies to healthy or moderately healthy insureds (typically age 65+). Viatical settlements receive favorable IRS tax treatment under Section 101(g) (payout is income-tax-free); life settlements are typically partially taxable.

Who qualifies for a viatical settlement?

Generally, you qualify if you have a life insurance policy with a face amount of $100,000 or more AND a chronic or terminal illness with a life expectancy of 24 months or less (some buyers extend to 60 months). The illness must be certified by a licensed physician. Common qualifying conditions: stage III or IV cancer, ALS, end-stage organ failure, advanced HIV/AIDS, multiple sclerosis (advanced), and other progressive terminal diseases. Specific eligibility varies by buyer.

How much can I get from a viatical settlement?

Viatical payouts typically range from 50 to 85 percent of the policy's death benefit, depending on (1) life expectancy (shorter life expectancy = higher payout percentage), (2) policy type (universal life and term policies typically pay more than whole life because of lower ongoing premium drag), (3) face amount (larger policies command better pricing), (4) age, and (5) the buyer's discount rate. A $500,000 policy on a terminally-ill insured with a 12-month life expectancy might fetch $300,000 to $400,000.

Are viatical settlement proceeds taxable?

Generally no. Under IRS Section 101(g), viatical settlement proceeds are treated as if they were received as a death benefit and are EXEMPT from federal income tax if (1) the insured is certified by a physician as terminally ill (life expectancy under 24 months) or chronically ill (per the IRS definition), AND (2) the buyer is a state-licensed viatical settlement provider. State tax treatment varies but most follow federal treatment. According to the IRS, this is one of the most consumer-favorable tax treatments in the tax code.

What is the alternative to a viatical settlement?

Three alternatives to consider before a viatical settlement: (1) Accelerated Death Benefit (ADB) rider - many modern policies allow you to access 50 to 100 percent of the death benefit while still alive if certified terminally ill, at no cost to the policyholder. (2) Surrendering the policy for cash surrender value - usually much lower than a viatical payout but immediate and certain. (3) Policy loans - access cash value tax-free as a loan while keeping the policy in force. Compare all four options before selling the policy.

What is the process for a viatical settlement?

Typical process: (1) Application - share policy details, medical records, and physician certification of terminal/chronic illness. (2) Underwriting - the buyer evaluates the policy and life expectancy with a third-party life expectancy provider. (3) Offer - the buyer presents an offer; you can accept, reject, or negotiate. (4) Closing - sign change-of-ownership documents, the policy is transferred to the buyer, and the buyer wires the lump sum (typically within 30 days of closing). The whole process takes 30 to 90 days.

What are the risks of a viatical settlement?

Key risks: (1) Loss of the death benefit your beneficiaries would have received. (2) Loss of privacy - the buyer may need to verify your health periodically during the policy life. (3) Public benefit eligibility - viatical proceeds may count as income/assets for Medicaid eligibility (consult an elder law attorney). (4) Buyer reputation - viatical fraud has occurred historically; work only with state-licensed viatical settlement providers. (5) Tax treatment edge cases - if the IRS later disputes terminal-illness status, the proceeds could become taxable.

Are viatical settlements regulated?

Yes, by state insurance departments. Most states have adopted the National Association of Insurance Commissioners (NAIC) Viatical Settlements Model Act, which licenses both viatical settlement providers (buyers) and viatical settlement brokers (intermediaries representing the seller). Regulations require disclosure of all offers, cooling-off periods to rescind the sale, and verification of terminal-illness status by an independent physician. The SEC also regulates viatical settlements as securities in certain contexts.

Who buys viatical settlements?

Buyers are typically institutional investors (hedge funds, pension funds, family offices) who acquire viatical settlements through state-licensed viatical settlement providers. Investors view the asset class as uncorrelated with equity markets, with returns driven by mortality experience versus life expectancy estimates. Direct retail purchase of viaticals has largely disappeared after consumer protection rules tightened in the 2000s. The buyer takes on the mortality risk: if the insured outlives the projected life expectancy, the investor's return diminishes.

Should I work with a viatical broker?

For most sellers, yes. A licensed viatical settlement broker represents the SELLER and is paid a percentage of the settlement (typically 5 to 8 percent). The broker solicits competitive offers from multiple licensed providers, increasing the final payout by 20 to 40 percent on average. The Life Insurance Settlement Association (LISA) is a professional association that maintains broker member directories. Always verify state licensing before engaging.

What is the Insurancy Viatical Settlement Calculator?

The Insurancy Viatical Settlement Calculator estimates the cash value you could receive from selling your life insurance policy based on your age, health status (terminal/chronic), policy type, face amount, and current premium. It is an estimation tool that helps you decide whether to pursue a formal viatical offer. Actual offers depend on detailed life expectancy assessment and policy underwriting; treat the calculator as a planning starting point, not a binding quote.