If you are diagnosed with a terminal illness, having access to your life insurance money could be life-changing. A Viatical Settlement can provide that access, allowing you to seek further medical treatment, improve your quality of life, or take that vacation of your dreams.
Although a Viatical Settlement is a big decision, there are many advantages, provided you understand all the implications, including the Viatical Settlement tax. Viatical Settlements are not taxed as a general rule. However, you could be liable for tax under certain circumstances, and you must know what they are to make an informed decision about your future.
A Viatical Settlement is when a terminally ill policy owner sells their life insurance policy to a third party. In return, they receive a lump sum payout they can use. It is a legally binding financial agreement in which the third party becomes the new owner and beneficiary of your life insurance policy.
Although your life insurance policy was intended to provide financial relief to your family after your passing, there are certain circumstances in which you may need to access its value, including paying for medical care. The decision to take a Viatical Settlement is personal, requiring careful consideration. You can expect to receive a percentage of the policy value, depending on your circumstances and life expectancy.
Before you decide if a Viatical Settlement is right for you, you should know everything about how it works and what you can expect.
You may consider a Viatical Settlement for numerous reasons, including the following:
Regardless of your reasons for considering a Viatical Settlement, consulting with an expert is essential. Together, you can review your financial needs and make an informed decision based on your unique situation.
Viatical Settlements require the seller or viator to meet specific criteria, including the following:
Generally, you do not pay taxes on Viatical Settlements. The Internal Revenue Service (IRS) excludes them from federal income taxation. There are some circumstances in which your settlement is taxable. Consider the following points on Viatical Settlement taxes:
If you have a terminal illness, a life expectancy of less than two years, and a qualifying policy, you will have a tax-free Viatical Settlement. In this case, the payment on your Viatical Settlement is considered a death benefit, not a capital gain, which means it is exempt from tax. However, if you have a terminal illness and your life expectancy is more than two years, you would need to seek an alternative to a Viatical Settlement.
Additionally, buyers of insurance policies must meet regulatory requirements in several states. While these requirements exist to protect the viator, you may still be required to pay tax if the buyer fails to meet them. Always discuss the tax with your qualified tax professional in detail to ensure you understand the implications.
In most cases, you have no legitimate tax concerns regarding federal law. However, as mentioned above, state laws vary depending on the state. The Life Insurance Settlement Association (LISA) has a detailed list of regulations you can check on their website. Here is a quick overview:
When considering a Viatical Settlement, research your state laws, as the variations can be significant.
Viatical Settlements and Life Settlements have different taxation requirements. A Life Settlement is also the sale of your life insurance policy in exchange for a lump sum but is designed for healthy older adults. While a Life Settlement has its advantages, it is essential to understand the differences in taxation.
In general, Life Settlements can be taxed. The funds you receive are unrelated to a terminal illness and are considered capital gains. Viatical Settlements are less than the death benefit would have been but larger than Life Settlements and are typically not regarded as taxable income.
If you are considering a Viatical Settlement, you already have much on your mind. We have answered some frequently asked questions to make the process as simple as possible:
As with any significant financial transaction, save all closing documents to use during tax season. Although your Viatical Settlement is not taxable, you must still declare it and provide any accompanying documentation.
From the time you apply, it will take your settlement broker six to eight weeks to complete the appraisal and gather the relevant information from your medical team and insurance company. Once you have accepted an offer, some settlement providers will expedite the process, depending on your situation, so you can receive your funds in a few weeks.
You likely will not pay taxes on your payment. However, as discussed, certain circumstances could leave you liable for tax. Discuss your specific situation in depth with your tax adviser and settlement broker.
Almost any type of life insurance could qualify for a Viatical Settlement. Some quick points include the following:
You will not have to pay fees to sell your life insurance policy.
Going through a Viatical Settlement is challenging, and it is normal to feel uncertain. You can change your mind during the process, as you are not obligated to proceed. If you change your mind after the settlement has been processed and you have received your payment, there is a small window in which you can change your mind, known as a rescission period.
The laws in your state define the time you can rescind the transaction. After the rescission period has elapsed, the transaction is complete, and you cannot undo it.
As the policy owner, you benefit from a Viatical Settlement when you receive your lump sum payment. Once the transaction is complete, the buyer becomes the sole owner and beneficiary. They pay all future premiums on the policy and receive the death benefit when you pass away.
Working with a settlement broker can help you get maximum value on your insurance policy. Your broker will work to find buyers on your behalf and negotiate the best possible price.
The proceeds of your Viatical Settlement may be subject to creditor claims. It is best to discuss any debt with your financial advisor or settlement broker for insight into your specific situation.
Viatical Settlements are regulated in most states, and the state’s Department of Insurance handles the licensing and oversight. Your broker can talk you through the regulatory requirements in your state.
A successful Viatical Settlement transaction consists of several moving parts. The process works as follows:
Your settlement provider will then own your policy, pay your premiums until you pass away, and collect the death benefit from the life insurance company.
The transaction involves you, your insurance company, and your settlement provider. Working with a trustworthy settlement broker is essential to ensure fair and competitive payment.
If you have decided a Viatical Settlement is worth exploring, remember these tips and tricks to ensure you get the best result possible:
Deciding to sell your life insurance policy is a significant decision. When you do, you want to know you are working with a settlement broker you can trust. Settlement Benefits Association was founded in 2002, and our experience and dedication to helping individuals maximize their life insurance means you get our best people on every case. Our job is to bring you the highest offer on your life insurance so you can spend your money however you choose.
Use our visual valuator to see if you qualify for a Viatical Settlement, or contact us for more information, and one of our dedicated specialists will be in touch to start the settlement process. Let Settlement Benefits Association help you get the best value on your life insurance when you need it the most.
Always discuss any taxation with your qualified tax professional.