What is a Viatical Settlement Transaction?


You may have heard of a life settlement before, where a policyholder sells their life insurance policy to a third party for a cash lump sum. Life settlements have been around for more than a century and have become more popular in recent times, largely due to increased awareness, easier accessibility.  

A viatical settlement is a special kind of life settlement where the payout is often higher, but certain requirements must be met. 

Keep reading to learn more about:

  • What a viatical settlement means in insurance
  • What happens under a viatical settlement; how does it work?
  • Differences between life settlements and viatical settlements
  • Frequently asked questions regarding viaticals

What Does Viatical Settlement Mean in Insurance?

Viatical is derived from the Latin word “viaticum”, which means “provision for a journey”. This refers to the final words someone may receive before their passing.

Whereas life settlements are available for those who possess permanent life insurance, such as whole or universal life, or a convertible term policy, with death benefits of at least $100,000 and are 65 years of age or older.  Viatical settlements are available to those who are chronically or terminally ill.  

Typically, viaticals have similar initial requirements, but they can be more flexible in terms of insured age and policy types. Most viatical settlements occur when the insured has a life expectancy of two years or less.

A Viatical Settlement Transaction 

In a viatical settlement transaction , the policyholder is selling their life insurance policy on the secondary market.  In exchange for a one-time cash lump sum payment the seller will no longer have the responsibility for premium payments and will no longer receive any death benefits from the policy.  

Viatical settlements are used as a form of accelerated death benefits for an insured facing chronic or terminal illness.  The insured benefits monetarily in two ways: by receiving a cash lump sum now and by no longer having to make premium payments. This can help ease the burden of any financial expenses they may be facing.

The settlement purchaser will consider numerous factors when determining eligibility for a viatical settlement and the value of the policy.  These may include specific things such as the insured’s medical condition, including  disease type and stage, and also insurance policy details such as amount of ongoing premiums and the total face value of your policy.

It’s important to note that there are some differences between a life settlement and a viatical settlement.  

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What is the Difference Between a Life Settlement and a Viatical?

The primary differences between life settlements and viaticals come down to a few things:

  • Availability: Viatical settlements are reserved for those who are chronically or terminally ill.  A life settlements is available for those who meet certain criteria, such as being 65 years or older, having a death benefit of at least $100,000, and having a type of permanent life insurance
  • Valuation: Given that the insured pursuing a viatical settlement is chronically or terminally ill, a viatical settlement is typically valued higher than a life settlement.
  • Regulation: Some states have regulation specifically pertaining to settlements for chronically or terminally ill.  

While life settlements are usually restricted to those with permanent insurance, like whole life,  universal life or convertible term insurance,  a viatical settlement can be more flexible.  In addition to those policies qualifying for a life settlement, group or term life may be eligible for a viatical. It is worth checking with the settlement provider to see if your policy is eligible.

If you’re not sure if a viatical settlement is right for you, our frequently asked questions will cover some of the most common concerns that people in this situation face.

Frequently Asked Questions About Viaticals

How are viaticals taxed? 

Most of the time, a viatical settlement is free from tax. One way to look at it is that the settlement proceeds are an advance of your life insurance benefit - and life insurance benefits are typically tax free.  However, with all things tax, there can be exceptions. Many state tax laws regarding viatical settlements follow federal guidelines, but some may not. The most important thing to consider is consulting a tax professional for guidance with respect to tax obligations.  

When can viatical settlements be transacted?

Viatical settlements are typically transacted when a person has been diagnosed as terminally ill and is expected to live 24 months or less or is certified as chronically ill. When the insured’s lifespan is longer than 24 months, they may not qualify for a tax-free viatical but can still pursue a regular life settlement.

What is the difference between a life or viatical settlement and cash surrender value?

If you’ve made it this far, you probably have a pretty good idea of what life and viatical settlements are and how they work. However, you may also have heard the term cash surrender and are wondering how it is different from a settlement. With a cash surrender, your insurance company will terminate your insurance policy and give you a cash sum equal to the surrender value. In this instance, since the policy is canceled, you no longer have to make payments on the premium or have access to the death benefit. On the other hand, with a life or viatical settlement, the new owner will take on the policy’s rights and obligations. In exchange for a cash payment, the new owner will continue to make premium payments and ultimately receive the death benefit.

Why would someone sell their policy instead of surrendering?

The most common reason people choose a cash surrender is to discontinue the policy to eliminate the ongoing premium expenses.  Most often, other financial priorities have become more pressing, such as  paying for unexpected medical expenses or ongoing expenses. In the case of a viatical settlement, a policy’s value may be greater than that of the surrender value, providing some financial help to cover the costs associated with palliative care or expensive medical treatment. Some people also use them to clear mortgages, enjoy trips with their family, helping with college tuition, and so forth.
