Navigating the financial landscape of life and viatical settlements can be complex, yet understanding the distinctions between these two options is crucial for individuals exploring ways to leverage their life insurance policies in times of need. This article provides a comprehensive overview of both life settlements and viatical settlements, highlighting their differences, benefits, and considerations to help policyholders make informed decisions.

What is a Life Settlement?

A life settlement refers to the sale of a life insurance policy by the policyholder to a third party for a one-time cash payment that is greater than the policy’s cash surrender value but less than the death benefit. Typically, life settlements are sought by individuals who are over the age of 65 and no longer need or can afford their existing life insurance policy. The buyer of the policy takes on the premium payments and eventually receives the death benefit when the original policyholder passes away.

What is a Viatical Settlement?

Viatical settlements are similar to life settlements but are specifically designed for policyholders facing a terminal illness. In a viatical settlement, the policyholder sells their life insurance policy at a discount from the policy’s death benefit to get immediate cash. This option is generally chosen by terminally ill patients who need to finance their medical expenses or improve their quality of life in their final months or years.

Key Differences Between Life and Viatical Settlements

Eligibility Criteria:

The fundamental difference between life and viatical settlements lies in the health status of the policyholder. Life settlements are typically available to healthy individuals who are older, often over 65, while viatical settlements require the policyholder to be terminally or chronically ill, with a considerably shortened life expectancy.

See: Types of Insurance Policies Eligible For Life Settlement

Tax Implications:

Another significant difference is in the tax treatment of the proceeds from each settlement type. Generally, proceeds from viatical settlements are tax-free if the policyholder is terminally ill. However, life settlement proceeds may be subject to taxes based on the amount of the payment exceeding the premiums paid.

Payout Amounts:

Viatical settlements usually offer higher payout rates compared to life settlements due to the shorter life expectancy of the policyholder, which means the investor expects a quicker return on investment.

Benefits of Each Settlement Type

Life Settlements:

• Financial Relief: They provide financial relief for seniors who may find the premiums unaffordable or unnecessary due to changes in their financial or personal circumstances.
• Liquidity: Offers liquidity to individuals who might need funds for retirement, long-term care, or other significant expenses.
• Flexibility: Allows policyholders to utilize the value of their life insurance without having to wait for death benefits, which only beneficiaries would receive.

Viatical Settlements:

• Immediate Funds: Provides immediate funds to terminally ill individuals, which can be used without restriction to cover medical costs, living expenses, or fulfilling personal wishes.
• Peace of Mind: Offers peace of mind during a difficult time by alleviating financial burdens and potentially enhancing the quality of life.