The Difference Between Viatical and Life Settlements

If you have life insurance, you likely got it so you could feel assured that your loved ones would be taken care of after you’re gone.

But as you reach retirement age, you may find that you need your life insurance to work for you now. If that’s the case, knowing the difference between a viatical settlement and a life settlement can help you make the best decisions for your future.

What do these settlements have in common?


Both a life and a viatical settlement involve selling your life insurance policy. There are many reasons you might choose to do this. If your children are already settled in life and you have no reason to worry about the financial future of a spouse, selling your policy can be a way to pay off the house or take that last dream vacation.

In other cases, you may have debts you don’t want to leave with your family. Selling your life insurance policy gives you a way to settle your finances before you go. Or it might just be too much for you to keep paying monthly life insurance premiums, and selling your policy will relieve you of that burden.

There are other reasons why you might sell your life insurance to life settlement companies. The reason you want to sell your policy is the deciding factor in whether you’d choose a life settlement or viatical settlement.

Understanding a life settlement

If your life insurance policy isn’t necessary anymore and you have a life expectancy of more than two years, then a life settlement is the only way to sell your policy. It’s a way to get back some of what you’ve been putting into that policy for all these years.

Making a life settlement allows you to finance your retirement or just relieve you of the financial burden of making life insurance payments every month. It can be a way to buy a dream home or pay for remodelling on your existing property to make it more comfortable for your future.

Understanding a viatical settlement

If you are terminally ill and your doctors give you two years or less to live, then a viatical settlement is the best choice. You can also choose a viatical settlement if you are chronically ill and doctors agree that you are unlikely to ever make a recovery.

The most common reason to get a viatical settlement is to pay off medical bills or to pay for medical procedures. Some people also use the money to check a few important items off their bucket list, or to make themselves more comfortable at the end of life.

Understanding the differences

The differences between a viatical and life settlement starts with qualification. You can only choose a viatical settlement if medical professionals say you have less than two years to live or a lifelong chronic illness.

If you make a life settlement, you have to pay tax on your settlement. The amount equal to the total premiums you have already paid is tax-free. After that, you are taxed at ordinary income rates for the amount up to the cash surrender value of your policy. Anything beyond that is taxed at capital gains rates. You can use an online tax tool to get a better idea of what you’d be paying in taxes

If you are terminally ill, a viatical settlement is tax free. If you are chronically ill, the settlement is tax-free as long as you use it to pay for long-term care needs that your insurance doesn’t cover. Anything beyond that is taxed at the normal rates.

If you liked the article, check out Is Health Insurance Mandatory for College Students?

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