Viatical Settlement

Updated on January 5, 2024

What Is A Viatical Settlement?

A viatical settlement is a type of transaction in which a person purchases an insurance policy from a chronically or terminally ill individual. This settlement was initially developed to help individuals with life-threatening illnesses who require immediate cash but cannot wait until their insurance policy matures.

Viatical Settlement

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The viatical settlement allows the policyholder to receive a lump sum payment from a third party in exchange for the rights to their insurance policy. The policy purchaser takes over responsibility for paying the remaining premiums and receives the full payout upon the policyholder’s death. While the seller may receive less than the full value of their policy, they can obtain much-needed funds to pay for urgent expenses.

Key Takeaways

  • A viatical settlement is a financial transaction where a terminally or chronically ill person sells their life insurance policy to a third party for a lump sum payment.
  • It originated in the 1980s as a way for AIDS patients to sell their life insurance policies.
  • Viatical settlements are generally tax-free, but the seller must have a life expectancy of less than 24 months, and they must be an individual (not a business or corporation).
  • Some states in the U.S., such as Alabama, Missouri, South Carolina, and Wyoming, have little or no regulations in place for viatical settlements.

How Does Viatical Settlement Work?

Viatical settlement agreements are contracts between a terminally ill person and another party. They were first developed in the 1980s for AIDS patients with a lower life expectancy rate. The person selling the policy is looking to do so for various reasons, such as having a short life expectancy, no beneficiaries, or an urgent need for cash. However, there is no guarantee of the return the buyer will earn.

Buying the policy is seen as an investment for the viatical settlement purchaser. If the seller passes away, the purchaser will pay the remaining premiums and receive benefits upon the policy’s maturity. However, the seller must compromise on some factors, receiving only 50-70% of the policy’s value. While the purchaser has to pay more surrender value, it is still less than the final payout value. However, these investments can be risky.

While most states in the U.S. regulate viatical settlement agreements, not all do. In certain states, to be eligible for this transaction, the policy must have a value of at least $100,000. Additionally, the seller must be in critical condition or very ill due to disease. Other factors that affect the transaction are premium costs, disease stage and type, and policy value. The National Association of Insurance Commissioners (NAIC) has created a statutory framework called the Viatical Settlements Model Act to address these concerns.

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Let us look at the examples of viatical settlement to understand the concept better:

Example #1

John is a terminally ill cancer patient with a life insurance policy worth $200,000. He struggles to pay his medical bills and wants to use his insurance policy to pay for his expenses. John decides to sell his policy to a viatical settlement company for $150,000. In exchange, the company takes over the policy’s premium payments and becomes the policy’s beneficiary. After John passes away, the viatical settlement company receives the policy’s death benefit of $200,000.

Example #2

In 1999, Kelly Couch purchased a $500,000 life insurance policy from Jackson National Life Insurance Company, intending to sell it in the viatical settlement market. However, he failed to disclose his HIV-positive status during the purchase. Later, he sold the policy to Sterling Crum with the help of a viatical settlement broker. Unfortunately, Kelly Couch passed away in 2005. When Crum attempted to insurance claim the policy benefits, Jackson National Life Insurance Company denied the claim due to misrepresenting the seller’s HIV status.

Subsequently, the case went to the Georgia Supreme Court, which declared the policy void due to the seller’s misrepresentation and wrongful intentions. The court stated that selling life insurance policies in the viatical settlement market can be permissible, but the seller must not engage in fraudulent behavior. Any attempt to conceal or misrepresent information concerning the policyholder’s health or life expectancy for personal gain violates the law. The court’s ruling underscores the importance of full disclosure and transparency in viatical settlements for buyers and sellers.

Tax Treatment

Let us look at the taxation of viatical settlements in the United States.

According to federal income tax laws, it is tax-exempt if parties are engaged in a viatical settlement, and the Viator (seller) receives any amount after the ill person’s death. The benefit the beneficiary receives after the seller’s death is also tax-exempt. However, certain states like Alabama, Missouri, South Carolina, and Wyoming do not have any state regulations for these viatical settlements. Certain conditions need to be met:

  • The seller must have a life expectancy of fewer than 24 months.
  • The Viator (seller) should be an individual and not a business.
  • The seller must be unable to perform at least two basic daily activities like dressing, grooming, and others.
  • No tax is applicable if the proceeds are used to pay for qualified long-term care expenses.

Viatical Settlement vs Life Settlement vs Accelerated Death Benefit

Although viatical, life settlement and accelerated death benefits transact an insurance policy, they have distinct differences. Let us look at them:

BasisViatical Settlement Life SettlementAccelerated Death Benefit 
Meaning A transaction where a terminally or chronically ill person sells their insurance policy to another person.A transaction where a healthy person sells their policy to a third party.The insurance company pays the insured a part of the final amount when they are very ill.
Purpose Designed for ill patients who need money.To sell the policy before the maturity date and receive a lump sum payment.Pass on benefits to the insured before they die.
Taxation Tax exempted Taxable Tax-free, but in some cases, may be taxable.
Age limit No age limit.Typically above 65 years of age.No age limit.

Frequently Asked Questions (FAQs)

1. Are viatical settlements legal?

Yes, viatical settlements are legal in many countries, including the United States, as long as state and federal laws regulate them. However, regulations and requirements may vary from state to state, and it’s important to consult with a licensed professional before entering into any agreement.

2. What are some important steps to consider before investing in viatical settlements?

Before indulging in a settlement with the Viator, there are certain important steps to follow.
● Consult a financial adviser, friends, or family before investing.
● Review, evaluate, and cross-check the seller’s policy terms. Also, consider if the seller has paid the premiums or their financial condition.
● Contact a broker to conduct the transaction.

3. What is a viatical settlement broker license?

It is a permit that allows an individual or entity to act as a broker or intermediary between a viatical settlement purchaser and a policyholder looking to sell their life insurance policy. The license is required in most states in the United States to engage in viatical settlement transactions.

This article has been a guide to what is Viatical Settlement. We compare it with life settlement & accelerated death benefits, with its examples and tax treatment. You may also find some useful articles here:

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