Life Insurance Settlements vs. Viatical Settlements: What's the Difference?
Wednesday, January 27, 2021
Section: Members

Life insurance and viatical settlements can be difficult to understand when doing research online. The two are often used interchangeably, however, several core differences exist in the two and not all policyholders are eligible for both. In this guide, we’ll provide you with everything you need to know about both viatical and life settlements. 


What is a Viatical Settlement?

A viatical settlement is eligible only for terminally ill and chronically ill policyholders. Upon receiving this diagnosis, they may choose to offer their life insurance policy for sale at a discount in exchange for a lump sum of cash. A third party is responsible for coordinating this arrangement, as well as well as the transfer of policy ownership.

Viatical Settlement: The Process

To start the process, the policyholder will need to connect with a settlement company to facilitate the sale of the policy. This company will find a buyer for the policyholder who will exchange the insurance policy for a lump sum of cash. Viatical settlement firms are also responsible for transferring ownership from policyholder to third-party buyer, in order to take the heavy lifting off the policyholder’s shoulders in such a trying time. The lump sum will amount to greater than the surrender amount, but less than the death benefit amount. At this point, the third party buyer will be responsible for maintaining the policy and its premiums for the rest of the term.


What is a Life Settlement?

Similar to a viatical settlement, a life settlement occurs when a life insurance policyholder decides to sell their policy in exchange for a lump sum cash payment. Most people of retirement age with an existing insurance policy will be eligible for a life settlement. Policyholders looking for a life settlement do not need to be sick. 

Life Settlement: The Process

Coordinating a life settlement payout is very similar to a viatical settlement. The policyholder will first need to get in touch with a settlement company who will need to find a buyer and facilitate transfer of ownership. A third party buyer will buy the policy and in turn, become responsible for all the costs of maintaining it until its expiration (usually the death of the policyholder). In exchange, the policyholder will receive a lump sum cash payment.


Main Differences between Viatical Settlements and Life Insurance Settlements 

There are a few main differences between viatical and life insurance settlements:

Medical Requirements

Only those diagnosed as terminally or chronically ill are eligible for viatical settlements. Most recipients of a viatical settlement are diagnosed with serious medical conditions. Payouts of viatical settlements are normally used for immediate medical expenses, loan payoff, and similar affairs. Alternatively, life settlements have much less strict requirements, generally reserved for individuals over the age of 65 who would like a bit of extra income during retirement.

Tax Structure

Money received from a life settlement is not exempt from federal income tax, as opposed to a viatical settlement. This obviously has a significant impact on the final payout when comparing viatical and life settlements. For more information, consult an experienced tax consultant or financial advisor.

Payout Amount

Viatical settlements generally have a larger payout, as the life expectancy of the policyholder is generally much shorter than that of a life settlement. In turn, the third-party buyer faces far fewer costs when maintaining the policy. 
While viatical and life settlements are similar, there are a few noticeable differences between the two. When deciding between a viatical or life settlement, be sure to reference this guide early and often to help you come to your final selection.