How is a Viatical Settlement Different Than a Life Settlement?

Clock January 05, 2023


30- second summary of how a viatical settlement is different than a life settlement?

Many people confuse viatical settlements with life settlements, think they’re the same thing, or have never heard of a viatical settlement.

This article will help you understand the similarities and subtle differences between the two, discuss why people pursue a viatical settlement, its benefits, and how to begin the process of selling your life insurance policy through a viatical settlement.

There has long been some confusion over the difference between a viatical settlement and a life settlement. Before clarifying the difference between the two, let’s first talk briefly about their similarities.

With both a life and viatical settlement, the owner of a life insurance policy sells their policy in order to receive a lump sum payment. The payment amount typically falls between the policy’s cash value and its current death benefit.

Most often, both life settlements and viatical settlements involve the sale of a permanent policy, such as universal life or whole life insurance. However, term policies can sometimes qualify, especially for viatical settlements.

In most all cases, the policyowner is at least 65 years old, and the policy’s death benefit is at least $100,000.

The policyowner receives a one-time cash payment when the policy sale is completed. After that, the new owner of the policy continues to maintain it and determines the beneficiary.

What is a viatical settlement, and how is it different than a life settlement?

The difference between a viatical settlement and a life settlement is a viatical settlement generally involves someone who is terminally ill selling their life insurance policy for immediate cash, while a life settlement usually involves someone who is not terminally ill and has a longer life expectancy.

The payouts for viatical settlements are typically higher than for life settlements because the buyer will have to make fewer premium payments before receiving the policy’s death benefit.

Tax implications of viatical settlements vary from those of life settlements. A viatical settlement is viewed (by the federal government) similar to a life insurance policy’s death benefit. Because of this, it is not subject to federal income tax. Life settlements, on the other hand, are subject to federal income tax and must be included as income on your federal tax return.

Lighthouse Life provides this overview for informational purposes only, and this should not be considered tax advice. Always consult a tax professional for additional information before making a financial decision.

As you can see, even though the term “life settlement” is more commonly used and is an all-encompassing term, there can be significant differences between life and viatical settlements.

Why choose a viatical settlement?

In most cases, someone selling their policy doesn’t need to “choose” between a viatical settlement or a life settlement. In many states, insurance regulators define when the sale of a policy is considered a viatical vs. a life settlement. Many states also have consumer protections in place, including minimum viatical payouts if an insured’s life expectancy is below a certain threshold.

The definition of a viatical settlement and who can qualify for one can vary by state. Several states do not differentiate between traditional life settlements and viatical settlements.

In many cases, individuals who qualify for a viatical settlement choose to sell their life insurance policies to fund further medical treatment or, in some cases, experimental treatments that their health insurance, Medicare, or Medicaid won’t pay for.

Someone terminally ill may also sell their policy in a viatical settlement because they want to reduce their debts before they pass away, such as a mortgage balance or business debts.

They may also need cash immediately to pay pressing bills, pay for a family emergency, or provide funds for an investment opportunity.

Many people who discovered they can sell a life insurance policy because it’s their personal property also use the proceeds to pay for a family member’s college tuition, buy them a home, or take family and friends on a dream vacation.

Explore a viatical settlement or life settlement with Lighthouse Life

If you’re considering talking with a viatical settlement broker or provider, contact Lighthouse Life. One of our trained, experienced life and viatical settlement experts will take the time to learn about your unique needs and help you receive the most cash for your life insurance policy as quickly as possible.

Contact us today to learn how selling your whole, universal, or term life insurance policy can help you live comfortably while providing additional financial stability.


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