As people approach retirement and begin to reexamine their expenses, life insurance policies are frequently left to lapse due to insufficient income to afford premiums or other financial obligations taking priority. In fact, seniors lapse more than $112 billion of life insurance every year. What many fail to realize, however, is that their life insurance policy is an asset, and it can be sold for cash–on average 5X more than the cash surrender value. In this article, we will discuss the two versions of this transaction: Life Settlements and Viatical Settlements.
Life settlements and viatical settlements are very similar in that they involve selling an existing life insurance policy to a third-party buyer (known as a provider) for more than the cash surrender value but less than the total face amount. While both options can play a pivotal role for those with immediate financial needs by providing lump sum payments for life insurance policies, there are key differences between life settlements and viatical settlements you should understand.
Key Takeaways
- A Viatical settlement is a financial transaction where a policyowner sells a life insurance policy insuring a terminally or chronically ill person who is unable to perform two or more activities of Daily Living. There is no minimum age requirement.
- A life settlement is a financial transaction where a policyowner sells an existing life insurance policy to a third-party buyer for cash. The insured typically needs to be at least 65 years old and the policy must have a face value of at least $100,000.
- Viatical settlements usually provide a higher payout as a percentage of face value compared to life settlements due to shorter life expectancy.
- While viatical settlements are typically tax-free, life settlements are subject to taxation depending on the settlement amount and the policyowner’s tax basis.
Understanding Life and Viatical Settlements
Life Settlements Definition
Life Settlements: A life settlement is the sale of an existing life insurance policy insuring an individual 65 or older to a third party for more than the cash surrender value but less than the total face amount. The buyer, known as a licensed provider, will take over all premiums and receive the death benefit when the insured passes.
Viatical Settlements Definition
Viatical Settlements: A viatical settlement is the sale of a life insurance policy insuring an individual with a terminal or chronic illness to a third party for more than the cash surrender value but less than the total face value.
Qualification Criteria for Settlements
Does your policy qualify for a life settlement?
- Insured is at least 65 years old.
- The life insurance policy has a face value of $100,000 or more.
- The insured has had a change in health since the policy was purchased.
Does your policy qualify for a viatical settlement?
- The insured has a terminal or chronic illness.
- The insured has a life expectancy of two years or less, or is unable to perform two or more Activities of Daily Living, as defined by the IRS.
- The life insurance policy has a face value of $100,000 or more.
The biggest difference between a viatical settlement and a life settlement is that you must be terminally ill to qualify for a viatical settlement, which can occur at virtually any age. Viatical settlements could also vary state by state, so it is best to research the qualifications and tax information in your state of residence before proceeding. Life settlements are typically only for individuals older than 65, and there is a minimum policy face amount to qualify. Once you’ve explored the differences between life and viatical settlements, contact Coventry Direct about your options to sell your life insurance.
Differences & Similarities
Financial Considerations
Tax Implications:
- Life settlements can be taxed in a few different ways. They can be tax-free, but only the proceeds you receive up to your tax basis (the total amount of premiums you paid over time). If you receive more proceeds than your tax basis but only up to the total of your policy’s cash surrender value, those proceeds will be taxed as ordinary income. Any remaining proceeds will be taxed as capital gains.
- For viatical settlements, you could possibly receive the entire cash value of your policy free from income tax. Usually, the state you live in, policy type, cash surrender value, and the insured’s life expectancy determine whether the settlement will be subject to taxation.
Payout Expectations:
- The average payout for a life settlement will be less than the death benefit but more than the cash surrender value. While it is difficult to value how much an individual could get without an evaluation of the policy, the payout will most likely be lower than a viatical settlement.
- The average payout for a viatical settlement is significantly higher than the payout for a life settlement because individuals due to the fact that the expected time to maturity is much shorter, and the provider will theoretically pay less in premiums over the insured’s lifetime. Due to their conditions and shorter life expectancy, they may also qualify to receive their viatical settlement payout tax-free.
Policy Owner Responsibilities
Post-Sale Ownership Responsibilities: After the sale of a life insurance policy through a life settlement or a viatical settlement, the policyowner receives a lump-sum payment for the policy and they no longer have any obligations to pay premiums on their policy. The new policyowner, the third-party licensed buyer, now has the responsibility of paying the monthly premiums and upon the insured’s death, they will receive the death benefit from the life insurance policy.
State-Specific Regulations: Since each state has the authority to set its own rules for life settlements, consulting with a financial expert familiar with your state’s laws is crucial. This ensures you are fully informed about your eligibility and any potential tax implications. For more detailed information about the tax implications, you can read this tax guide.
Frequently Asked Questions (FAQs)
What is the primary difference between a life settlement and a viatical settlement?
The primary difference between life and viatical settlements is that a viatical settlement is intended for an individual who is terminally or chronically ill, and the payout is usually used for immediate living and medical expenses. A life settlement can provide lump-sum payments for healthier seniors and the funds are generally used for living, traveling, medical, and any other expenses that come their way.
What would be included in the evaluation of a viatical or life settlement?
A licensed provider will consider age, health, life expectancy, and the life insurance policy face amount when evaluating eligibility for a life settlement or viatical settlement.
What is the purpose of a viatical settlement?
The purpose of a viatical settlement is to enable policyowners an additional choice rather than going back to the carrier to collect any accrued cash value. Additionally, a viatical settlement can provide a lump-sum payment that is less than the death benefit but greater than the cash surrender value to provide someone who is terminally ill a way to cover their medical and living expenses.
How Coventry Direct Can Help
Many questions can arise when deciding whether to sell your life insurance policy. Our team at Coventry Direct is ready to answer any questions you may have regarding life settlements. Our goal is to educate policyowners that life insurance is an asset that can be sold through a life settlement or viatical settlement, and help them understand if their policy qualifies to be sold.
Reach out to Coventry Direct about viatical settlements and life settlements and to find out if you qualify to sell your life insurance policy today!
