Viatical Settlements vs Life Settlements: Definitions and Differences

Are you considering selling your life insurance policy, but not quite sure how a viatical settlement differs from a life settlement?

The two are often mistakenly used interchangeably, but there are several key differences you should be aware of when trying to determine your eligibility, and what option is best suited for your unique needs.

In this comprehensive guide, we’ll provide the definition for each term and walk you through the process of selling your life insurance through a viatical and life settlement. Find out how they work, as well as why people pursue each option. If you are eligible and decide to sell, you can even get a free estimate on the cash value of your life insurance policy!

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Viatical Settlement Definition

When someone is terminally or chronically ill, they may choose to sell their life insurance policy to a third party through an arrangement known as a viatical settlement. During this process, the ill person agrees to sell his or her life insurance policy at a discount in exchange for a lump sum of cash that can be used to cover expenses while living or to set affairs in order (such as paying off loans).

How does a Viatical Settlement Work?

A viatical settlement becomes an option when a life insurance policyholder is diagnosed with a terminal illness or is chronically ill to the point where they can no longer perform two or more activities of daily living (such as eating, bathing, using a toilet, or dressing) for at least 90 days. 

Upon diagnosis, the policyholder can sell their life insurance for cash through a viatical settlement. To start the process, the policyholder connects with a viatical settlement company that will help facilitate this exchange. The role of viatical settlement companies is to take care of the hard work so the policyholder doesn’t have to deal with additional stress during this time. 

The viatical settlement company will find a buyer for the life insurance policy and facilitate the transfer of ownership from the policyholder to the third-party buyer. At this point, the policyholder will no longer be responsible for the policy premiums, and in exchange they’ll get a lump sum cash payment. The cash payment will be less than the death benefit amount, but it will be greater than the surrender amount and the policyholder will have the financial freedom to use the money as they please while they’re still living.

The third-party who bought the policy will be responsible for all expenses related to the policy, and they’ll continue paying premiums until the policyholder passes away (at which point, they’ll receive the death benefit amount) from the insurance company.

Defining the Two Types of Viatical Settlements

There are two types of viatical settlements that vary depending on the severity of the policyholder’s condition and/or illness.

Terminally Ill Definition

The United States government considers someone to be terminally ill if they are suffering from a serious illness and have a life expectancy that is fewer than 24 months from the date of diagnosis by a physician.

Chronically Ill Definition

The United States government considers someone to be chronically ill if they are unable to fulfill at least two activities of daily living on their own for at least 90 days. These are essential activities of daily life such as eating, bathing, using a toilet, or dressing among others. If a person requires considerable supervision to perform these activities, they may be defined as chronically ill in accordance with the federal qualifications for the term.

 

Life Settlement Definition

A life settlement is when a life insurance policyholder decides to sell their policy to a third-party for a lump sum cash payment. Sound familiar? A life settlement is similar to a viatical settlement, but there are a few key differences to note in the process among other things. 

How does a Life Settlement Work?

The process for obtaining a life settlement begins when a policyholder decides to sell their life insurance policy to a third-party. While viatical settlements are often used to cover urgent medical expenses, people often pursue life settlements to gain additional financial freedom in retirement.

Unlike a viatical settlement, the policyholder does not need to be sick in order to obtain a life settlement. In fact, many people pursue life settlements around the age of 65 while they’re still healthy so they can make the most of their remaining years.

To begin the process of obtaining a life settlement, a policyholder gets in touch with a settlement company that finds a buyer and facilitates the transfer of ownership for the policy. Once the right buyer is found, the policyholder will receive a lump sum cash payment and the buyer will take on all costs of maintaining the policy (such as premiums) until the former policyholder passes away. When this occurs, the buyer will receive the death benefit amount specified in the policy from the insurance company.

 

Key Difference Between Viatical Settlements and Life Settlements

Viatical settlements are often confused and incorrectly used synonymously with life settlements, but there are several key differences between the terms outside of the aforementioned process.

    1. Eligibility

As mentioned earlier, only people diagnosed as terminally or chronically ill are eligible for a viatical settlement, whereas you are not required to be sick for a life settlement. Life settlements are also typically for people above 65 years old, whereas a viatical settlement is designed to provide a relief option for a person of any age facing extreme medical circumstances.

    2. Payment Amount

A viatical settlement typically provides policyholders with a significantly higher payout compared to traditional life settlements. This is because the life expectancy of a person seeking a viatical settlement is far shorter, so the third-party buyer will likely incur fewer expenses of maintaining the policy (such as residual premium costs). This also helps the diagnosed policyholder to cover urgent medical expenses that may be significantly higher than someone seeking a life settlement.

    3. Tax Impacts

Unlike life settlement payouts, money received from a viatical settlement is generally not subject to federal income tax. The only exception would be in the case of a chronical illness viatical settlement, where the funds not used to cover long-term care expenses are taxed. Other than that specific case, you get to keep the entire cash payout for a viatical settlement! By comparison, a life settlement requires you to report the money you receive as income on your next tax return. The tax impacts of a settlement will vary by situation, so we always recommend talking to a tax consultant or financial advisor before making a decision. This should not be considered tax advice.

 

Reasons to Pursue a Viatical or Life Settlement

There are several reasons why someone may want to pursue a viatical or life settlement. In both cases, many people opt to sell their life insurance policy rather than letting it lapse. Common reasons for a lapse in coverage include high premium costs, or a lack of need due to the absence or financial independence of beneficiaries. Don’t let your policy lapse, get a FREE cash value estimate and find out how much you can sell it for instead!

While the aforementioned reasons explain why someone may opt to sell their policy for a viatical or life settlement, there are a few key differences in why someone would choose to pursue a specific option:

Common Reasons to Pursue a Viatical Settlement

  • You are diagnosed with a terminal illness and need money to cover urgent medical expenses
  • You are diagnosed with a chronic illness and need money to cover the costs of long-term care

Common Reasons to Pursue a Life Settlement

  • You want to pay off outstanding debts, such as a mortgage
  • You want to supplement your retirement with additional income for a more enjoyable lifestyle
  • You want a cash reserve to cover emergency expenses when needed

 

What to Keep in Mind Before Deciding on a Viatical or Life Settlement

It’s important that you always consider all the choices that are offered to you and examine them thoroughly. Don’t let your life insurance expire and don’t agree to surrender the value of your insurance until you have researched all your options.

Settlement companies will help you obtain the most cash from your insurance policy. By maximizing the value of your settlement, you can turn the unwanted policy into cash that you can put towards current expenses.

 

How to Choose a Viatical or Life Settlement Company

When looking at selling your life insurance policy, you’ll work with either a provider, broker, or settlement company (in some cases, you may work with a combination of these options). 

A settlement provider is the third-party that purchases the life insurance policy from the policyholder, occasionally, a provider also happens to be an investor. When you’re looking for a settlement provider—always make sure that the company is legitimate. This means that they need to have the proper documents and licenses to purchase life insurance policies on behalf of institutional stockholders. For a company to facilitate the transfer of even a single third-party life insurance policy, it should be a licensed settlement provider. 

You may also want to contact a broker, who shops the case to multiple providers so you can get the best offer. Harbor Life’s sister company Suncrest Benefits is a licensed broker so when you register with Harbor Life, we may also work with our broker to ensure you get the most money for your case.

Settlement companies such as Harbor Life act as facilitators to help you navigate the process of selling your life insurance through a life or viatical settlement. They do the heavy lifting so all you have to do is provide a few health documents and answer a few questions. Settlement companies will also use their associations with providers and brokers to help you get the maximum value for your case.

It’s important to choose a trusted and qualified settlement company because you want to ensure they have experts who will get you the most money from selling your life insurance policy.

 

Get More Information to Pursue a Life or Viatical Settlement

Still have questions? You’re not alone, there’s a lot of information to consider and it’s easy to get lost in the legal lingo of confusing paperwork when trying to determine if you’re eligible to sell your life insurance and how you should go about the process. This is why many people turn to a settlement company like Harbor Life Settlements for expert guidance and assistance.

Our team of experts is happy to answer any question you may have and we’ll help you determine if you are eligible, and if so we’ll walk you through the process of selling your life insurance so you can be informed and feel confident in your decision.

Get in touch with our experts and we’ll give you a FREE estimate on the cash value of your life insurance policy, should you decide to sell.

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