What Is a Viatical Settlement?

Reducing uncertainty is vital when you’re dealing with end-of-life issues or managing a chronic illness. Unpredictable costs related to your long-term care needs add to your family’s financial and emotional burden. If you have life insurance but you’re worried about paying for long-term care soon, a viatical settlement might lessen your financial stress. 

With a viatical settlement, you sell all or part of your life insurance policy for a cash payment — money you can use to pay for long-term care and other expenses. In this article, we introduce you to these transactions and lay out the most important details to consider.

Who qualifies for a viatical settlement?

Aiming to protect sellers from predatory buyers, insurance laws and regulations allow only certain people to take part in a viatical settlement. To qualify, you must either:  

• Have a life expectancy of 2 years or less, or

• Be chronically ill and unable to complete daily tasks like feeding, attending to personal hygiene, or getting dressed 

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A terminally ill person who sells their life insurance policy is known as a viator.  

How does a viatical settlement work?

Licensed investors — sometimes called viatical settlement providers (VSPs) — are the only people who can buy your policy. They pay a discounted price upfront so they can collect your death benefits after you’ve passed. You can sell your policy directly to a VSP or hire a viatical settlement broker (VSB) to explore options for you.

There are many shady companies out there, so insurance regulators recommend getting referrals to VSPs and VSBs. You could ask your current insurance agent, financial advisor, banker, accountant, or attorney. They are likely to know the reputable providers and brokers licensed in your state.

Working with a VSB saves you time and effort, but it does come at a cost. The amount that brokers charge ranges widely. On the low end, expect to pay 5% to 15% of the settlement; on the high end, 30% to 50%. When meeting possible brokers, ask about commission rates — and their willingness to negotiate.

Many factors go into your policy’s valuation, including your projected life expectancy. VSPs pay more for policies owned by the oldest and sickest people. Medical underwriters look at your medical history, demographics, and, in some states, health insurance claims history, to make that determination.

Once you find a buyer, it can take 4 to 6 months to complete the transaction.

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What's a reasonable price for a life insurance policy?

Viatical settlement companies usually pay between 50% to 80% of the total death benefit. Based on your policy’s benefit, you can estimate how much a VSP might pay. Here’s an example.

Is a viatical settlement taxable?

A viatical settlement doesn't usually count as taxable income for people who are terminally or chronically ill. But it must be purchased by a broker who meets certain IRS requirements. 

What is the difference between a viatical settlement and a life settlement?

Viatical settlements are for people who are terminally or chronically ill, no matter their age. Also, as noted, the proceeds from a viatical settlement typically aren’t considered taxable income. 

Life settlements are generally only available only to women age 74 and older and to men age 70 and older. Life-settlement proceeds are taxed. 

Is a viatical settlement right for me?

One key consideration is whether you can wait a few months before getting the settlement, since the process can take a while.

Another concern: The money you get from a viatical transaction could change your eligibility for food stamps or Medicaid. If it does, make sure the settlement is more than enough to cover the lost government support on top of your medical needs. If it doesn’t, the settlement may not be worth doing.

In making your decision, you should also talk to: 

• Your family, about quality of life and financial planning concerns

• Your banker and financial advisor, about your cash holdings and your investments

• Your insurance agent, about all the types of coverage you have

• Your accountant, to understand tax implications

Is a viatical settlement better than long-term care insurance?

In some cases, a viatical settlement is a better option than long-term care insurance: 

• The money is tax-free.

• The buyer pays all remaining premiums.

• There is no need to undergo medical underwriting.

However, long-term care insurance may be preferable if:

• You’re relatively healthy and expect to live many more years.

• Cash from a viatical settlement affects your eligibility for Medicaid, SNAP benefits, or housing assistance. 

Risks vs. rewards of a viatical settlement

Should I work with a viatical settlement broker?

If you’re considering a settlement, you already have a lot to deal with. Working with a licensed VSB can: 

• Make it easier to identify and investigate VSPs

• Free up your time so you can spend it with family and friends, engaging in hobbies, or tending to your health

• Increase your confidence, since most states require brokers to meet stringent licensing requirements

Due diligence is critical to avoid being victimized. There are two ways to do your due diligence: 

• Do it yourself. Look up each VSP in the National Association of Insurance Commissioners (NAIC) database. Verify each one’s licensure, check its financial stability rating, and read any complaints. Then contact your state’s department of insurance to confirm a VSP’s licensure is still in effect.

• Pay someone else. Some insurance brokers do due diligence for you as part of the services included in their commission. Or, you could hire a lawyer, financial advisor, or accountant to handle it for you.

How can I tell if I’m being scammed for my life insurance?

The best way to avoid being scammed is to be aware of common fraud tactics.

Here are three indications that you’re being scammed: 

1. You’re contacted to buy a policy and then sell it immediately.

2. The representative pressures you to make a decision or accept a settlement.

3. The person wants you to buy an annuity.

If you believe you’re being scammed:

• Report it first to your state’s consumer protection office. 

• Call local law enforcement if you’ve lost money or property.

• Notify the Federal Trade Commission online or by phone at 1-877-382-4357. 

What are the best practices to sell my life insurance?

Many state departments of insurance list best practices for people getting a viatical settlement. This list is based on recommendations from several state insurance commissioners.

Viatical settlement checklist

• Check the NAIC database to verify the company’s or broker’s financial stability and see any past complaints.

• Confirm broker and company licensure with your state department of insurance.

• Ask questions:

  • Do I still need life insurance protection?

  • How will the buyer decide how much cash I receive?

  • How and when do I receive payment?

  • Who will be the legal owner, and can the policy be resold?

  • What information will the purchasers or investors receive about my family, my health status, or me?

  • Is all the application form data accurate, especially my health history and status? 

  • Does my state provide a look-back period during which I can change my mind?

  • How will the buyer use my personal, financial, and health data? 

• Compare offers.

• Have the settlement proceeds put in escrow with a bank that is not affiliated with the buyer.

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Written by:

Margot Lester

Margot Lester began her journalism career as a teenager, reporting news from the high school for her local paper. In the course of her 38-year career, she has written for national magazines, big-city newspapers, business journals, and trusted websites.

Edited by:

Caren Weiner, MSIS

Caren Weiner, MSIS, began her personal finance journalism career in 1986. She worked as a reporter for Money magazine and co-wrote its book-length “Guide to the 1986 Tax Reform Act.” From the beginning, she immersed herself in data on mutual fund total returns and marginal tax rates.

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