
Who qualifies for a viatical settlement?
Viatical settlements are for people who are terminally or chronically ill, no matter their age. Also, as noted, the proceeds from a viatical settlement typically aren’t considered taxable income. Life settlements are generally only available only to women age 74 and older and to men age 70 and older. Life-settlement proceeds are taxed.
What does viatical settlement mean?
A viatical settlement is an arrangement in which you sell a life insurance policy to a settlement company before the insured person dies. The settlement company takes ownership of the policy and eventually receives the death benefit. A viatical settlement is one way to access a significant portion of your policy’s value prior to death.
What is a viatical settlement transaction?
In a viatical settlement transaction, the life insurance policyholder transfers ownership to the buyer. That means the seller is no longer responsible for the policy premiums. The third party, known as a viatical provider, assumes responsibility for all expenses related to the policy.
Is Pip settlement taxable?
The tax status of PIP payments depends on what they were for. Most PIP payments are for medical expenses and are not taxable income. If your PIP protection includes lost earnings, the portion you received to cover lost wages is taxable. Are pain and suffering payments taxable?

What is the maximum tax-free amount that can be paid under a viatical settlement?
In such cases, the new law limits the amount of a viatical settlement that can be tax-free under these arrangements to either 1) $175 per day or 2) $63,875 annually (more likely in the case of periodic or lump sum viatical settlement payments).
What happens under a viatical settlement?
A viatical settlement allows you to invest in another person's life insurance policy. With a viatical settlement, you purchase the policy (or part of it) at a price that is less than the death benefit of the policy. When the seller dies, you collect the death benefit.
How are life settlement proceeds taxed?
To recap: Sale proceeds up to the amount of the cost basis are not taxable. Sale proceeds above the cost basis and up to the policy's cash surrender value are taxed as ordinary income. Any remaining sale proceeds are taxed as long-term capital gains.
Do you pay taxes on life insurance settlements?
Answer: Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received.
Who benefits from a viatical settlement?
Viatical settlements are for people who are terminally or chronically ill, no matter their age. Also, as noted, the proceeds from a viatical settlement typically aren't considered taxable income. Life settlements are generally only available only to women age 74 and older and to men age 70 and older.
How much can you sell a $100 000 life insurance policy for?
Pros and Cons to Selling your Life Insurance Policy On average, if you have a $100,000 life insurance policy, you will be receiving about $25,000. The next big advantage is that you won't have to make any more premium payments on your insurance policy.
How can I avoid paying taxes on a settlement?
Spread payments over time to avoid higher taxes: Receiving a large taxable settlement can bump your income into higher tax brackets. By spreading your settlement payments over multiple years, you can reduce the income that is subject to the highest tax rates.
Do I have to report a 1099 LS on my tax return?
Under IRC Section 6050Y, every person or entity who acquires a life policy in a reportable policy sale is required to tax report such transactions under IRS rules. Generally, the acquirer must provide a Form 1099-LS to the IRS.
What is the minimum age at which a life settlement is normally permitted?
Age. In the majority of cases, an individual must be over 65 to qualify for a life settlement, although younger people might enter into settlements if they have certain medical conditions.
Is a Life Settlement tax-Free?
Is A Viatical Settlement Taxable? Most of the time, viatical settlements are not taxable. Settlement proceeds for terminally ill insureds are considered an advance of the life insurance benefit. Life insurance benefits are tax-free, and so it follows that the viatical settlement wouldn't be taxed, either.
Is life insurance considered inheritance?
Life insurance is not considered to be taxable income in the way that an inheritance can be taxed. While there are ways to avoid inheritance tax (such as through a trust), these taxes can be considerable if your estate is large. By using life insurance instead, the death benefit can go entirely to your family members.
Can the IRS take life insurance money?
If the insured failed to name a beneficiary or named a minor as beneficiary, the IRS can seize the life insurance proceeds to pay the insured's tax debts. The same is true for other creditors. The IRS can also seize life insurance proceeds if the named beneficiary is no longer living.
How much do viatical settlements pay?
What are the Differences Between Viatical Settlements and Accelerated Death Benefits?Viatical SettlementsHow much can I get?VSPs pay a lump sum usually from 50% to 85% of the face value of your policy, depending on your life expectancy.6 more rows
What is the difference between a life settlement and a viatical?
The two main categories of insurance policy sales are life settlements and viatical settlements. A life settlement differs from a viatical settlement because the insured in a life settlement is usually healthy, while a viatical settlement pertains to a sale by an insured with a terminal illness.
What is the meaning of viatical?
viatical. / (vaɪˈætɪkəl) / adjective. of or denoting a road or a journey. botany (of a plant) growing by the side of a road.
Who does a viatical settlement broker represent?
“Viatical settlement broker" means a licensed agent who acts on behalf of a viator and for a fee, commission or other valuable consideration offers or attempts to negotiate viatical settlements between a viator and one or more viatical settlement providers.
When did viatical settlements become taxable?
In 1996 , the Health Insurance Portability and Accountability Act (HIPAA) exempted viatical settlement proceeds from income and capital gains tax. Prior to the implementation of that law, viatical settlements were taxable.
What is viatical settlement?
A viatical settlement is defined as the sale of a life insurance policy from an insured individual who has a life expectancy of 24 months or less to a viatical settlement company. While undergoing the viatical process, the company you’re working with will order a life expectancy report from a medical underwriting company.
What happens if you don't take a viatical settlement?
If you don’t take a viatical settlement and your life insurance pays out after your death, your beneficiaries don’t have to pay any income tax on the payout. However, the value of the life insurance settlement becomes part of your estate.
Is a viatical settlement tax free?
Although funds from the settlement are tax-free, it’s important to make sure the person handling your taxes is knowledgeable of viaticals and how to file them correctly. When working with your CPA or financial advisor, make sure you obtain a copy of the executed closing documents to provide them for tax season. Then, they should be able to file your settlement in the appropriate manner so your funds are exempt from being taxed. For further information, you can also visit the Internal Revenue Service website to read more about how they classify the funds as tax-free for a viatical settlement.
Is a whole life insurance policy cash surrender taxable?
Cash Surrender. If you have a whole life insurance policy, you may have considered surrendering your policy in exchange for its cash value. In most cases, a viatical settlement gives you more money than surrendering a life insurance policy for its cash value. On top of that, cash surrender amounts are taxable.
Is cash surrender taxable?
On top of that, cash surrender amounts are taxable. These payments aren ’t based on your illness and because of that , they aren’t tax free. To give you an example, let’s say that the cash surrender value is $50,000, and the viatical settlement offer is $80,000.
Is cancer financial assistance taxable?
Types of Cancer Financial Assistance that are Taxable. Although viatical settlements are not taxable, there are some other forms of cancer financial assistance that are subject to taxes. Be sure to keep this in mind when researching your options.
What is a viatical settlement?
In a nutshell, a viatical settlement is the sale of a life insurance policy where the insured person has a terminal or chronic illness. The life insurance policy is sold to an unrelated third-party, which is usually a life settlement company. This may be done through a life settlement broker in many cases. It works like this:
Viatical settlements: A brief history
Viatical settlements first appeared in the wake of the AIDS epidemic back in the 1980s. Life insurance purchasers, known as viators, approached terminally ill AIDS patients and offered them a cash payment in return for their life insurance policies.
Viatical settlement taxation: Is my settlement taxable?
The tax implications for viatical transactions are somewhat complicated in general, but can be much more complex in certain instances, depending upon the seller’s health condition and financial circumstances.
Viatical settlement taxation for long-term terminally ill individuals
Viatical settlements for chronically ill insureds that have more than two years to live are tax-free to the extent that the viatical settlement proceeds are used to pay for qualified medical or long-term care expenses that are not covered by health insurance, long-term care insurance or Medicaid.
Common myths about viatical settlements
There are also several common misconceptions about viatical transactions and the viatical settlement industry that have confused the public about the nature of these settlements, how they work, and who they are designed for. Four of the biggest myths about viatical settlement offers are:
Can I sell my life insurance policy in a viatical settlement?
A quick look at the rules listed above should give you a pretty clear idea of whether you qualify for a viatical transaction or not. If you are terminally ill, and a doctor has signed a statement dictating that you have two years to live at most, then you should qualify with no problem.
Get a free valuation of your life insurance policy
Viatical settlements are not simple transactions. And they must be considered at a time when the insured is probably deeply contemplating his or her own mortality, along with his or her family members and other loved ones.
Viatical Settlement Taxation: The Complete Guide
Viatical settlements can be a godsend for terminally ill patients who need cash immediately to pay for medical bills or other forms of managed care. It can also help insureds by removing the cost of insurance from their budgets.
What is a viatical settlement?
In a nutshell, a viatical settlement is the sale of a life insurance policy where the insured person has a terminal or chronic illness. The life insurance policy is sold to an unrelated third-party, which is usually a life settlement company. This may be done through a life settlement broker in many cases. It works like this:
Viatical settlements: A brief history
Viatical settlements first appeared in the wake of the AIDS epidemic back in the 1980s. Life insurance purchasers, known as viators, approached terminally ill AIDS patients and offered them a cash payment in return for their life insurance policies.
Viatical settlement taxation: Is my settlement taxable?
The tax implications for viatical transactions are somewhat complicated in general, but can be much more complex in certain instances, depending upon the seller’s health condition and financial circumstances.
Viatical settlement taxation for long-term terminally ill individuals
Viatical settlements for chronically ill insureds that have more than two years to live are tax-free to the extent that the viatical settlement proceeds are used to pay for qualified medical or long-term care expenses that are not covered by health insurance, long-term care insurance or Medicaid.
Common myths about viatical settlements
There are also several common misconceptions about viatical transactions and the viatical settlement industry that have confused the public about the nature of these settlements, how they work, and who they are designed for. Four of the biggest myths about viatical settlement offers are:
Can I sell my life insurance policy in a viatical settlement?
A quick look at the rules listed above should give you a pretty clear idea of whether you qualify for a viatical transaction or not. If you are terminally ill, and a doctor has signed a statement dictating that you have two years to live at most, then you should qualify with no problem.
How long does a viatical settlement last?
If the purchaser is compliant and a physician has certified that the insured has less than 24 months to live, the viatical settlement proceeds are tax-free as long as the policyholder is an individual. Here are three scenarios to explain how that requirement works in practice:
What to do before accepting a viatical settlement offer?
Before accepting a viatical settlement offer, verify your prospective buyer is licensed if it’s required in your state. Or, if you are working with a broker, verify that your broker only markets your policy to qualified life settlement providers.
Which states do not require licensing for viatical settlement?
According to the Life Insurance Settlement Association, the only states that don’t regulate viatical settlements, as of September, 2018, are Alabama, Missouri, South Carolina, South Dakota, Wyoming, and Washington, D.C. Verify the current laws in your state by asking your tax advisor. If the state does not require licensing, then the provider must comply with disclosure guidelines and, for terminally ill insureds, payment guidelines in the NAIC’s Viatical Settlements Model Act.
Does the IRS require viatical settlement?
It might seem odd that the IRS imposes requirements on the purchaser in a viatical settlement. After all, you’re the one who will foot the tax bill, and you have little control over how a viatical settlement provider conducts business.
Is it taxed to ignore a viatical settlement?
Unfortunately, taxation is not a subject to ignore when you’re considering any transaction that results in a cash payment to you. Overlooking a tax liability can get you into a different financial bind, either because you incur IRS penalties for under-withholding or you overestimate the transaction’s net proceeds. If you are exploring a viatical settlement as a way to convert your life insurance asset into cash, now is the right time to question the tax implications of that strategy.
Is a terminally ill mom's life insurance policy taxable?
Your mom is the insured and you, an individual, are the policyholder. If the other requirements are fulfilled, the settlement proceeds to you should not be taxable. Your terminally ill mom’s corporate employer has a life insurance policy on her.
Is a settlement taxable if the purchaser is not compliant?
Even if you fulfill the requirements on your side, if your purchaser is not compliant, the settlement will be taxable. You have another complication in play, too. State tax law is not consistent from state to state, and it can also change from year to year.
Tax on Life Insurance Settlement
First, it’s important to understand the basics of a life insurance settlement, typically known as a viatical settlement. Policyholders who have a permanent life insurance policy and are facing a terminal illness may be eligible to sell their policy in order to access cash for end-of-life preparations.
What Do the Laws Say?
In 1995, the federal government undertook a major overhaul of the laws regarding taxes on life insurance settlements in a broad legislative package known as the Health Insurance Portability and Accountability Act (HIPPA).
An Alternative to Viatical Settlements
An alternative is Life Credit’s Living Benefits Loan program, which allows policyholders to borrow against the value of their policy’s death benefit to access the cash while they’re alive.
What is viatical settlement?
As a reminder, a viatical settlement arises when an insured person with a chronic or terminal illness sells his/her life insurance policy to a third party. The agreed price is usually greater than the cash surrender value but less than the death benefit.
What does it mean when a provider must pay a certain amount of the policyholder's death benefit?
This means that providers must pay a certain amount of the policyholder's death benefit depending on the policyholder's life and meet special operating criteria. The smaller the life expectancy, the more money the provider has to offer for the policy.
Is viatical settlement subject to state taxes?
In some cases, viatical settlement payments are subject to state and federal taxes. This post will explain current federal laws and guidelines for the tax treatment of viatical settlement.
Do federal tax numbers always match?
Federal tax numbers do not always match those in individual states, and states do not always follow IRS daily rate guidelines. To this end, it is imperative to consult a personal tax consultant or financial advisor and your state government for fair and up-to-date tax policies on a viatical settlement.
Can state tax laws change?
State tax laws are inconsistent from state to state and can even change from year to year. Many states follow federal tax guidelines on a viatical settlement, but some don't.
Do you pay taxes on viatical settlements?
At the federal level, most viatical settlement payments are treated the same as a death benefit. This means that the money you receive has no taxes. But first, you need to ensure that you meet all the requirements of the Internal Revenue Code, the law that establishes the basis for taxing viatical settlements.
Is viatical settlement taxable?
In most cases, viatical settlements are not taxable. The liquidation income of terminally insured persons is treated as an advance on the life insurance benefit. The benefits of life insurance are tax-exempt, so even the conceivable solution would not be taxable.
What is viatical settlement?
The IRS refers to the money that changes hands in a life insurance settlement transaction as accelerated death benefits. According to the IRS’s Tax Guide for Seniors, viatical settlement taxes are not owed under certain circumstances.
Can a beneficiary claim an exclusion from income?
Note that the exclusion from income cannot be claimed by a beneficiary who receives a settlement for an insurable interest that arose because the beneficiary was the insured’s employer or an investor in the insured’s company.
Can you exclude life insurance settlement from income?
To exclude a life insurance settlement from your income and reduce your viatical settlement taxes to zero, you must have a terminal or chronic illness. You may qualify if you meet these criteria:
Is life insurance settlement money taxable?
For the chronically ill, life insurance settlement money may be excluded in its entirety from taxable income if it is used to pay for long -term medical care for the insured . Settlement money not spent on medical services is excludable up to a limit.
Is a life insurance settlement taxable?
Life settlements do not qualify as a tax free advance of your death benefit. The amount of premiums you have paid into your policy over the years is your tax basis. Any proceeds from selling your life insurance policy, less the ‘tax basis’ (what you have paid into your policy) is taxable.
Is a viatical settlement tax exempt?
Viatical settlements are considered an advance of your death benefit and are therein tax free. For the sale of a life insurance policy to be considered a tax exempt viatical settlement, you need to have a life expectancy that is under 2 years. However, most people who sell their life insurance policy have a life expectancy in excess of 2 years, making life settlement taxation important to understand as you consider selling your life insurance.
What Is a Viatical Settlement?
A viatical settlement is an arrangement in which someone who is terminally or chronically 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 benefit to a beneficiary of their choice.
Who licenses viatical settlements?
In many states in the U.S., companies that buy viatical settlements to sell to investors are licensed by state insurance commissioners. For more information and a list of state insurance regulators, visit the National Association of Insurance Commissioners (NAIC).
How long does a life insurance policy last in a viatical settlement?
In a viatical settlement, the life expectancy of the insured is generally two years or less. If a life insurance policyholder is considering a life settlement, they should first consider all available options for obtaining the needed cash. There might be a better way to utilize a life insurance policy.
How long does a life insurance settlement last?
A life settlement differs from a viatical settlement in that the insured seeking to sell their life insurance policy has an estimated life expectancy greater than two years.
Why is the rate of return unknown?
The rate of return is unknown because it's impossible to know when someone will die. If you invest in a viatical settlement, you are speculating on death. Therefore, the longer the life expectancy, the cheaper the policy. However, because of the time value of money (TVM), the longer the person lives, the lower your rate of return.
Can a buyer of a viatical settlement check on your health?
The buyer of a viatical settlement is allowed to check on your health condition periodically . Make sure you understand who will get access to this information. All questions on an application form must be answered truthfully and completely—especially questions about medical history.