A viatical settlement is the sale of a
life insurance policy by an individual who is terminally
ill. The individual sells the policy to a third party (often
a viatical settlement funding company) that pays the
individual a lump-sum cash payment that is a percentage of
the face value of the policy (usually 40 to 85 percent).
Terminally ill individuals may wish to sell their life
insurance policies in order to use the money in advance of
their death rather than leaving it directly to a
beneficiary. For instance, you may want to sell your life
insurance policy in order to have money to pay for living
expenses, to pay for medical care, or to experience the joy
of using or giving away the money before you die.
Who can sell a life insurance policy?
Selling your life insurance policy means selling your rights
and obligations under the policy to the funding company.
Most viatical settlement funding companies buy policies only
from individuals who are terminally ill. In general, you
must have a life expectancy of less than four years in order
to be eligible to sell your policy, although some companies
buy policies only from individuals whose life expectancy is
less than 24 months. However, a growing number of companies
have begun to purchase life insurance policies from elderly
individuals who are not terminally ill.
Who can buy a life insurance policy?
Life insurance policies are usually purchased by
viatical settlement funding companies or providers. These
companies are sometimes financed by investors or by loans
from financial institutions. According to the Internal
Revenue Code, a viatical settlement provider is a person
who, as a business, regularly purchases or takes assignments
of life insurance contracts. The viatical settlement funding
company that purchases your policy will make money by
receiving the full value of your policy when you die, even
though it paid you only a percentage of the face value.
Once you sell your policy, the viatical
settlement funding company will normally pay your policy
premiums, which may cut into the company's profit margin.
However, to compensate for this, viatical settlement funding
companies may give you less money for your policy.
How much will you receive for your
Normally you will receive between 40 and 85 percent of
the face value of your policy. How much you actually
receive, however, depends on several factors, including the
face value of the policy, how much the viatical settlement
company will have to spend to continue paying your insurance
premiums, and your projected life expectancy. Normally, the
longer your life expectancy, the less you will receive.
How do you choose a viatical settlement
company or provider?
Viatical settlement companies or providers are usually
registered with, or licensed by, the state Department of
Insurance, although many states do not require viatical
settlement companies or providers to be licensed. Before
doing business with a viatical settlement company or
provider, determine whether or not the company is licensed
or registered to do business in your state, and what your
state's requirements are. This is important because whether
or not the company or provider is licensed or registered
plays a part in determining whether the proceeds paid to you
from the sale of your policy will be tax free. In addition,
find out whether you will have to pay any additional fees
(e.g., attorney's fees) after your policy is purchased, and
make sure that once you sell your policy, funds owed to you
will be kept in an escrow account for you until you receive
them (it may take a few weeks to complete such a
Should you sell your life insurance
Selling your life insurance policy is a very personal
decision, and there is no single right decision for
everyone. However, here are some factors to consider:
- What are the potential income tax and
estate tax consequences of selling the policy?
- Will selling your policy for less than
face value adversely affect your survivors? Would they
be better off receiving the funds after your death?
- Are there any other sources of funds
you could use to fund your wants and needs?
- Under the terms of your insurance
contract, do you have options other than selling your
policy? For instance, can you borrow against the policy?
Does the policy have any cash value? Does the policy
include an accelerated death benefit rider or a living
Income tax considerations
As of January 1997, if you have a life expectancy of 24
months or less, the money you receive from selling your life
insurance policy will be tax free, as long as the viatical
settlement company is licensed or registered with the state
in which you reside (Internal Revenue Code Section 101(g)).
If licensing or registration is not required by your state,
then the viatical settlement company or provider must meet
the requirements of sections 8 and 9 of the Viatical
Settlements Model Act issued by the National Association of
Insurance Commissioners (NAIC). If you have a life
expectancy greater than 24 months or are chronically rather
than terminally ill, money you receive for your policy may
be taxable. Check with your tax professional for further
Gift and estate tax considerations
Selling your life insurance policy may have gift and/or
estate tax consequences as well. If you sell your policy
before you die, and then distribute the proceeds to your
family members, you may owe gift taxes if you give each
individual more than $10,000 in a given year. In addition,
selling your life insurance policy cannot be used as a
strategy to minimize any estate taxes owed. If you sell your
policy within three years of your death, then the proceeds
may be added back into your estate for tax purposes.
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