If you’ve been researching ways to get cash from a life insurance policy, you’ve probably come across two terms that sound similar: life settlement and viatical settlement. They’re related — both involve selling a life insurance policy to a third party — but they serve different people in very different circumstances.
Understanding the distinction matters because it affects who qualifies, how much you’ll receive, and how the money is taxed.
What Is a Life Settlement?
In a life settlement, a senior who no longer needs or wants their coverage sells the policy to a licensed third-party buyer, receives a lump-sum cash payment, and the buyer takes over the premium payments and eventually receives the death benefit.
The buyer is making a long-term investment, so the insured’s life expectancy plays a major role in determining the offer price. Seniors who meet the standard qualification requirements may be eligible.
What Is a Viatical Settlement?
A viatical settlement is the sale of a life insurance policy by someone who has been diagnosed with a terminal or life-threatening illness and typically has a life expectancy of two years or less. The term “viatical” comes from the Latin word viaticum, meaning provisions for a journey.
Viatical settlements first became widely known during the HIV/AIDS crisis of the 1980s and 1990s. Today, they remain an important financial tool for anyone facing a serious illness.
Typical viatical settlement candidate:
- Any age (no minimum age requirement)
- Diagnosed with a terminal or chronic illness
- Life expectancy generally two years or less
- Owns a life insurance policy of any size
Key Differences at a Glance
Who Qualifies
- Life Settlement: Seniors, typically 65+
- Viatical Settlement: Anyone with a terminal illness
Health Status
- Life Settlement: Normal to impaired health
- Viatical Settlement: Terminal or life-threatening illness
Life Expectancy
- Life Settlement: Typically 2–15 years
- Viatical Settlement: Typically 2 years or less
Payout (% of Death Benefit)
- Life Settlement: Usually 20–50%
- Viatical Settlement: Often 50–80% or more
Tax Treatment
- Life Settlement: Partially taxable
- Viatical Settlement: May be tax-free
Regulation
- Both are regulated in most states
Each of these differences has practical consequences worth understanding.
Payout Differences
This is one of the most significant differences. Because the buyer of a viatical settlement expects a much shorter holding period, they’re willing to pay a higher percentage of the death benefit.
- Life settlement payouts typically range from 20% to 50% of the face value, depending on the insured’s age, health, policy type, and premium costs. On a $500,000 policy, that might mean $100,000 to $250,000.
- Viatical settlement payouts often range from 50% to 80% or more of the face value. On the same $500,000 policy, a viatical offer might be $250,000 to $400,000 or higher.
The shorter the life expectancy, the higher the payout tends to be — because the buyer will pay premiums for a shorter time and receive the death benefit sooner.
Tax Treatment Differences
This is where the two types of settlements diverge most sharply, and it’s an area where professional tax advice is essential.
Viatical Settlements
Under the Health Insurance Portability and Accountability Act (HIPAA) of 1996, viatical settlement proceeds may be completely tax-free if the insured is certified as terminally ill (life expectancy of 24 months or less) or chronically ill (meeting specific criteria). This provision was created to ensure that people facing terminal diagnoses could access their policy’s value without a tax burden.
Life Settlements
Life settlement proceeds are partially taxable. The IRS treats the gain in three tiers:
- Return of premiums paid: The portion of the payout up to your total premiums paid (your cost basis) is received tax-free.
- Gain up to cash surrender value: The portion between your cost basis and the policy’s cash surrender value is taxed as ordinary income.
- Gain above cash surrender value: Any amount received above the cash surrender value is taxed as a capital gain, which is typically at a lower rate.
The exact tax impact depends on your specific situation. Read more about life settlement tax implications and consult with a tax professional before completing a transaction.
Regulatory Differences
Both life settlements and viatical settlements are regulated at the state level. Most states require buyers, brokers, and providers to be licensed. However, the specific rules can differ:
- Some states have separate licensing categories for viatical and life settlement transactions
- Disclosure requirements may vary
- Waiting periods (the time after a policy is issued before it can be sold) apply in some states and may differ between the two types
A licensed broker will navigate these requirements on your behalf, ensuring the transaction complies with your state’s regulations.
Who Should Consider a Viatical Settlement?
If you or a loved one has received a terminal diagnosis, a viatical settlement can provide immediate financial relief. The funds can be used for anything — medical bills, experimental treatments, hospice care, or family support.
Here are several reasons to explore this option:
- Speed. Viatical settlements can often close faster than life settlements because the shorter life expectancy makes the policy more attractive to buyers.
- Higher payouts. As noted above, you’ll typically receive a larger percentage of the death benefit.
- Tax advantages. The proceeds may be entirely tax-free, putting more money in your hands.
- No restrictions. The money is yours to use however you see fit.
If someone with a terminal illness is considering surrendering their policy to the insurance company, a viatical settlement should be explored first. The surrender value is almost always significantly lower than what the open market will pay.
Who Should Consider a Life Settlement?
A life settlement is the right fit for seniors who:
- No longer need or want their life insurance coverage
- Can no longer afford the premiums
- Want to convert an unneeded policy into cash for retirement, medical expenses, or long-term care
- Would otherwise surrender the policy or let it lapse
The payout will be lower as a percentage of the death benefit compared to a viatical settlement, but it will almost always be higher than the policy’s cash surrender value.
What Citizens Life Group Can Do
Citizens Life Group specializes in life settlements — connecting seniors with licensed life settlement brokers who can evaluate their policies and secure competitive offers. If your situation involves a terminal diagnosis and a viatical settlement may be more appropriate, we can help point you toward the right resources.
Regardless of which type of settlement applies, the first step is the same: finding out what your policy is worth.
Which One Applies to You?
Whether you’re exploring a life settlement or a viatical settlement, we can help you understand your options. Request a free estimate or call (321) 270-0279.