Viatical Settlement Versus Life Settlement: Understanding the Differences

by | Sep 16, 2020 | Financial Featured

When you reach retirement age and find that your life insurance policy is no longer meeting your needs, you may decide to sell it. Many seniors find that their life insurance policy becomes unnecessary and is no longer affordable.

Rather than surrendering the policy without any financial gain, consider selling your life insurance through a viatical settlement or a life settlement. Understanding how each of these options works will help you determine which choice is right for you.

What is a Viatical Settlement?

A viatical settlement offers an individual with a life insurance policy, who is terminally ill or facing a chronic illness, the option of selling the policy for a cash lump sum. This transaction involves an agreement between you (the life insurance policy owner) and an unrelated third-party.

The third-party purchases the policy for an amount greater than the cash surrender value but less than the death benefit amount. You receive the money and are no longer responsible for paying the premiums.

A viatical settlement is possible if you are diagnosed with a terminal or chronic illness. For at least 90 days, you must be no longer able to perform two or more activities required for daily living. This can include eating on your own, as well as using the toilet, bathing and dressing.

Reasons to Consider a Viatical Settlement

If you are diagnosed with a terminal or chronic illness, a viatical settlement can make your life and the lives of those caring for you more comfortable and manageable.

In the case of terminal illness, the cash from the settlement can provide money needed to cover urgent medical expenses. If you’re suffering from a chronic condition, the cash can allow you to cover the cost of long-term care.

What is a Life Settlement?

A life settlement involves the sale of your life insurance policy in order to obtain financial freedom. In exchange for selling your life insurance policy to an unrelated third-party, you obtain a lump sum cash payment. This payment can be used to fund your retirement.

You don’t need to be ill to obtain a life settlement. Many seniors 65 and older often pursue life settlements while they’re still healthy and active so they can enjoy their retirement years.

Like a viatical settlement, you sell your policy to a third-party and receive cash. The buyer takes on all responsibilities of the policy, including paying the premiums.

Reasons to Consider a Life Settlement

If you’re 65 or older and in good health, a life settlement may be a good option. You can use the cash payout to supplement your retirement funds. This has the added benefit of improving your budget, as you no longer need to make premium payments.

Many seniors find that a life settlement enables them to pay off outstanding debts, such as a mortgage, that could become financially burdensome in later years. Others find the settlement provides a ready cash reserve in case of emergencies. For some, the money provides extra cash to enjoy life, such as going on a dream vacation.

How Viatical Settlements and Life Settlements Differ

While viatical settlements and life settlements both involve the sale of your life insurance policy for cash, there are key differences between the two.

  • Requirements

In order to qualify for a viatical settlement, you must have been diagnosed with a terminal or chronic illness that interferes with your ability to perform basic living tasks. With a life settlement you needn’t be ill, but you must be 65 years or older. There is no age requirement for a viatical.

  • Payout Amount

Viatical settlements generally result in a higher payout than life settlements. This is the case with a viatical settlement because your life expectancy is much shorter. The third-party for a viatical will pay less in premiums.

  • Tax Ramifications

When you receive a viatical settlement, the money is usually not subject to federal income tax. On the other hand, life settlements are taxed as income. How much tax you pay will depend on your financial situation. (Consult your tax advisor or accountant.)

If you want extra money to make your retirement more comfortable, a life settlement may be an ideal choice. But if you need money to cover medical costs for a terminal or chronic condition, a viatical settlement could be your answer.

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