March 03, 2023
When it comes to viatical settlements, advisors sometimes conflate them with life settlements. While many of the broad features of the two are similar, there can be important differences between them. This can cause confusion when your clients broach the topic and seek your guidance.
This article will help you understand the similarities and subtle differences between the two, discuss why a client might pursue a viatical settlement, its benefits, and how to begin the process of selling their 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.
Generally, viatical settlements are a subcategory of the life settlement market. With both a life and viatical settlement, the owner of a life insurance policy sells their policy in exchange for a lump-sum payment. The payment amount is greater than the policy’s cash value but lower than its death benefit.
Both life settlements and viatical settlements involve the sale of a policy; most commonly, a universal life policy. However, whole life, term conversion, and non-convertible term policies may also qualify especially for viatical settlements.
In most cases, 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.
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.
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. Contact your state insurance department for information about current requirements in your state.
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 diagnosed with a terminal illness 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 or home or take family and friends on a dream vacation.
If you’re considering talking with a viatical settlement broker or provider on behalf of a client, contact Lighthouse Life. One of our trained, experienced life and viatical settlement experts will take the time to learn about their unique needs, walk you through our process, and help your client receive the most cash for their life insurance policy as quickly as possible.
Contact us today to learn how selling a whole, universal, or term life insurance policy can help your clients live comfortably while providing additional financial stability.