There are two methods by which a life insurance policy holder may sell his/her policy to a third party to receive a cash purchase price prior to their death.
The first method is a “life settlement”. A life settlement is when a life insurance policy holder decides to sell their policy to a third party for a lump sum cash payment. Typically, the sale is for the entire life insurance policy but in some instances a policy holder may sell only a portion or percentage of a life insurance policy.
The second method is a “viatical settlement.” A viatical settlement is an arrangement whereby a person with a terminal illness sells their life insurance policy to a third party for less than its mature value, in order to receive cash proceeds while the person is still alive.
So, you do not have to be terminally ill to be eligible for a life settlement although typically life settlements only work for individuals who are 65 or older. There is no age requirement for a viatical settlement in that the only requirement is that a policyholder be terminally ill meaning that a qualified physician has certified that a policyholder will likely die within 18 months.
The payment amounts for each method are also typically different. Payments for viatical settlements usually provides policyholders with a significantly higher payout compared to traditional life settlements. That’s because the life expectancy of a person seeking a viatical settlement is far shorter than someone seeking a life settlement.
Proceeds paid under both methods are also taxed different. Viatical settlement proceeds are not subject to any federal income tax. A certain portion of life settlement proceeds may be subject to federal income tax. The amount of any cash surrender value in a policy is usually tax free while the rest of the proceeds paid in a life settlement will be subject to ordinary income tax and a portion subject to capital gains tax. The bottom line is that viatical settlements are not taxed while apportion of life settlements are taxed.
A policy holder usually seeks a viatical settlement because they are terminally ill and need the cash proceeds while they are living to pay for medical expenses and related support. The most common reasons policy holders pursue life settlements is that the policy holder no longer needs the insurance coverage, they can no longer afford it or want to supplement their retirement assets and income. The need for money now versus later is usually the key motivation for policy holders in life settlements.
Are you considering a life settlement for a policy you no longer want, need or can’t afford? Please contact us for a no obligation/no fee analysis on whether a life settlement makes sense for you!
Dan A. Penning
Life Settlements Specialist
Professional Life Settlements Plus
