What’s the difference between Viatical and Life Insurance Settlements?

You probably have heard the term “viatical settlement” and you may also have heard the term ‘life settlement”. You may have even assumed that the two terms referred to the same thing. 

Well, a viatical settlement is completely different from a life settlement .Each  settlement process has its own unique requirements and has different reasons for policy owners to initiate one process or the other. The  key differences between the two settlement processes determine a policy owners eligibility and what option is best suited for an individual’s needs.

What is a Viatical Settlement and how does it work?

A viatical settlement is when the insured is terminally or chronically ill and they may choose to sell their life insurance policy to a third party .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 the person is living or to set their affairs in order like paying off loans etc..

A viatical settlement is available when a life insurance policy owner 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 (like eating,bathing,dressing, etc..) for a period of at least 90 days.

After a diagnosis as indicated above, the policyholder can sell their policy through a viatical settlement. The policyholder starts this process by contacting a viatical settlement company who is in the business of handling the sale of a policy to a third party. The viatical settlement company will find a buyer for the life policy and facilitate the sale of the policy by handling all of the various details to accomplish the sale.

The third party who buys the policy will be responsible for all the expenses related to the policy and they will continue paying premiums until the policyholder passes away at which time the third party receives the payout of the death benefit.

What is a Life Settlement?

A life settlement does not require any health determination for the insured  policy owner.Unlike a viatical settlement, the policy owner does not need to be sick in order to obtain a life settlement. Most people pursue life settlements after they are retired while they're still healthy so they can make the most of their remaining years.

All that is necessary is for a policy owner to decide to sell a policy to a third party for cash. A life insurance policy is an asset that the owner is free to sell to a willing buyer for a usually agreed upon price.

To start the process of a life settlement, a policy owner contacts a life settlement company that finds a buyer and facilitates a transfer of ownership of the policy. Like a viatical settlement, the third party purchaser of the policy assumes and pays all the expenses of the policy including premiums and then is entitled to the death benefit payout at the time of the insured individual’s death.

Is a settlement a great alternative for you?

Viatical and Life Settlement Payment Amounts.

A viatical settlement usually provides the policyholder with a higher purchase price compared with a life settlement. This is based on the fact that in a viatical settlement, the insured’s life expectancy is far shorter, so the third party purchaser will incur fewer expenses of maintaining the policy.

Taxes on Payouts.

Money received by a policyholder in a viatical settlement is not subject to any federal income tax just as though the money had been paid as a death benefit. The only exception to this rule is in a viatical situation based upon the insured’s chronic illness and there are proceeds not used to pay for long term care expenses related to the illness. In that case the unused portion of the payout would be subject to income tax.

By comparison, in a life settlement, some of the sale proceeds are subject to income tax. Basically, the amount of premiums paid to the insurance company basis) are income tax free. Proceeds received that are greater than the tax basis up to the amount of the cash surrender value are taxed at ordinary income tax rates. Proceeds received that are in excess of the amount from the previous sentence, get taxed as capital gains.

Conclusion.

Settlement companies will assist a policy-owner obtain the most cash from the sale of an insurance policy in both a viatical settlement or life settlement scenario.

When looking to sell a life insurance policy for any reason, make sure the settlement company you choose to work with is legitimate. Ask questions relative to the process, make sure there are no out of pocket fees to you and check out other client references.

At the Penning Group, we enjoy an excellent reputation for our integrity and client service. Contact us today for all your life settlement needs.