A viatical settlement is the sale of a life insurance policy where the insured person is either terminally or chronically ill. In order to understand the difference between a viatical and a life settlement, it is important to fully understand the definition of a viatical settlement.
In this sense there are actually 2 types of viatical settlements. The first is for someone who is terminally ill. Terminally ill is defined as having a life expectancy of less than 24 months. The second is for someone who is chronically ill. Chronically ill is someone who can no longer perform two or more of the following activities; eating, using the toilet, bathing oneself, or dressing oneself. Chronically ill also describes someone who requires substantial supervision to protect him/herself from threats to health and safety.
Life insurance settlement definition
In a viatical or life settlement transaction the life insurance policy holder transfers ownership to a life insurance buyer, also known as a provider. The former policy holder is no longer responsible for the policy premiums and receives a cash payment that’s larger than the surrender value of the policy. The provider is now responsible for all expenses related to the policy.
The key distinction between a life settlement and a viatical settlement is whether the insured is terminally/chronically ill or not.
Why does it matter?
The distinction between a life settlement and a viatical does not generally affect the transaction process but it does have very specific tax consequences.
For an insured person that is terminally ill, the viatical settlement payout is entirely tax free.
For an insured person that is chronically ill, the viatical settlement payout is tax free only for proceeds used to pay for long-term care services that are not compensated by insurance. Other uses of proceeds are subject to taxation.
For an insured person that is neither terminally nor chronically ill, standard life settlement taxation is a bit more complicated.
Mason Finance does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.