If you or a loved one is considering selling a life insurance policy, two common options often come up: life settlements and viatical settlements. At first glance, they might seem similar — both allow policyholders to exchange a life insurance policy for a lump sum of cash. But when comparing a life settlement vs a viatical settlement, the differences can have major implications for your finances, eligibility, and overall planning.
Understanding how these two options work – and which one may be right for your situation – can make all the difference when navigating difficult health or financial decisions. While both offer the benefit of converting a non-liquid asset into immediate funds, they serve different purposes and are intended for different life circumstances. One is designated for seniors looking to offset retirement or long-term care costs. The other is intended for individuals with serious illnesses who need fast access to funds for medical expenses or end-of-life planning.
In this guide, we’ll break down the key differences between life settlements and viatical settlements, including who qualifies, how payouts are determined, and what pros and cons to keep in mind. If you’re thinking about selling a policy, this is the information you need to make an informed, confident decision.
Key Takeaways
- What’s the difference? The key difference between a viatical settlement and a life settlement is the policyholder’s health: viatical settlements are for those with a terminal or serious illness, while life settlements are typically for seniors with no immediate health crisis.
- Why choose one over the other? Someone might pursue a viatical settlement to cover urgent medical or end-of-life expenses, whereas a life settlement is often used to supplement retirement income or reduce insurance costs.
- What about taxes? Viatical settlements are usually tax-free if the seller is terminally ill, while life settlements may be subject to income or capital gains taxes depending on the policy and payout.
Key Differences Between Life Settlements and Viatical Settlements
While both life settlements and viatical settlements involve selling a life insurance policy for a lump-sum payment, the circumstances under which they’re used — and the implications that come with them — can vary significantly. Choosing the right path depends on your health, financial needs, and long-term goals. Here’s how they differ across some of the most important factors.
Investor’s Role
In both life and viatical settlements, a third-party investor purchases the life insurance policy and becomes the new beneficiary. That investor then takes over the premium payments and eventually collects the death benefit. This setup is significant because the investor’s return is tied to how long the insured lives, which is why viatical settlements, involving terminally ill policyholders, are typically more appealing to investors due to a shorter investment horizon. In life settlements, the timeline is longer, so investors may offer a smaller payout in exchange for the extended wait.
Health Status of Policyholder
Health is the primary factor that determines eligibility. Viatical settlements are intended for individuals diagnosed with a terminal illness, usually with a life expectancy of two years or less. Life settlements, on the other hand, are generally available to seniors–typically 65 or older–who are not terminally ill but may have outgrown their policy or no longer need the coverage. The policyholder’s life expectancy plays a key role in the settlement amount offered.
Premium Payments after Sale
Once the policy is sold–whether through viatical or life settlement – the investor takes on the responsibility of paying future premiums. This is an important distinction because it lifts an ongoing financial burden off the original policyholder. However, the cost and duration of those premiums can influence how much money the seller receives upfront. In life settlements, longer life expectancies mean more premium payments for the investor, often resulting in lower offers compared to viatical settlements.
Use of Funds
The money received from selling a life insurance policy is typically unrestricted and can be used however the policyholder sees fit. In viatical settlements, the funds are often used to pay for medical treatments, hospice care, or end-of-life expenses. Life settlements, by contrast, may help cover retirement costs, eliminate premiums on unneeded policies, or provide extra income during later years. In both cases, the payout offers financial flexibility during a critical time–but the motivations behind the sale are often quite different.
Tax Implications
Tax treatment is one of the biggest differences between viatical and life settlements. In most cases, viatical settlements are tax-free under federal law if the policyholder is terminally ill, meaning the proceeds aren’t subject to income tax. Life settlements, however, are generally treated as taxable income. Depending on the policy’s cash value and the amount received, you may owe income or capital gains taxes. That’s why it’s essential to consult with a tax professional before making any decisions – especially when navigating complex settlements that can impact your financial future.
Financial Considerations and Alternatives
Before deciding to sell a life insurance policy, it’s important to explore all your financial options. A life or viatical settlement can offer fast access to funds, but there may be other strategies that better fit your goals or situation. Comparing potential payouts, evaluating tax consequences, and understanding policy features can help you make a more informed decision.
Cash Surrender Value vs Settlement Payouts
Many life insurance policies include a cash surrender value–the amount the insurer will pay if you cancel the policy. While this can provide quick access to cash, it’s often significantly lower than what you’d receive through a life or viatical settlement. In fact, life settlement payouts typically fall between the cash surrender value and the full death benefit. For policyholders seeking the highest possible return, settlements generally offer more value than simply surrendering the policy.
Accelerated Death Benefit Riders
If you’re facing a terminal illness, your existing policy might already include an accelerated death benefit rider. This allows you to access a portion of your death benefit early — often up to 50% or more — to help cover end-of-life care or major expenses. Unlike viatical settlements, this option keeps your policy in force and avoids involving third-party investors. However, any funds received will reduce the death benefit your beneficiaries eventually receive.
Borrowing Against the Policy
Another alternative to selling your policy is taking out a loan against its cash value. This option allows you to maintain the policy while tapping into funds when needed. However, unpaid loans will accrue interest and reduce the death benefit. If the loan balance grows too large, the policy could lapse. Borrowing may work well for short-term needs, but for larger financial gaps, a settlement may still provide greater relief.
1035 Exchange
For those who still want life insurance coverage but need a policy that better suits their current situation, a 1035 exchange could be the answer. This IRS-sanctioned option lets you trade one life insurance policy for another — or even for certain annuities — without triggering immediate tax consequences. A 1035 exchange is ideal for policyholders who no longer want their current policy but aren’t ready to part with life insurance altogether.
Understanding Life Settlements
Life settlements can be a strategic financial tool for seniors who no longer need their life insurance policy or can no longer afford the premiums. By converting a policy into a cash payout, individuals can unlock immediate value from an asset that might otherwise go unused. Here’s what you need to know.
What Is a Life Settlement?
A life settlement is a financial transaction in which a policyholder sells their life insurance policy to a third-party investor for a lump sum of cash. The amount received is less than the policy’s death benefit but typically more than the cash surrender value. After the sale, the investor becomes the new owner and beneficiary, takes over premium payments, and eventually receives the death benefit.
Eligibility for Life Settlements
Life settlements are typically available to policyholders who are 65 or older and have a life insurance policy with a face value of at least $100,000. While a terminal diagnosis is not required (unlike viatical settlements), your health status still plays a role — individuals in average or declining health may receive higher offers than those in excellent health. Eligible policy types usually include universal life, whole life, and convertible term policies.
How Life Settlements Work
The life settlement process begins with a consultation to determine if your policy qualifies. From there, the policy undergoes a valuation process, including a review of medical records and premium costs. After underwriting, you’ll receive an offer based on your life expectancy and the policy’s value. If you accept, the ownership is transferred, you receive the lump sum payout, and the investor assumes responsibility for future premiums.
Payout Ranges for Life Settlements
While every case is unique, life settlement payouts typically range from 10% to 25% of the policy’s face value. The exact amount depends on factors like age, health status, premium obligations, and how long the investor expects to hold the policy. For many seniors, this payout offers a meaningful financial boost — especially when the policy is no longer serving its original purpose.
Understanding Viatical Settlements
For individuals facing a terminal illness, a viatical settlement can offer financial relief at a time when it’s most needed. Unlike life settlements, which are typically used by seniors in retirement, viatical settlements are designed specifically for those with serious health conditions and limited life expectancy. These settlements can help cover medical expenses, living costs, or any immediate financial needs — all while giving policyholders control over how their funds are used.
To learn more about how these differ from standard life settlements, visit our What is a Life Settlement guide.
What Is a Viatical Settlement?
A viatical settlement is a financial arrangement in which a terminally ill policyholder sells their life insurance policy to a third-party investor in exchange for a lump sum cash payment. The investor becomes the new beneficiary, assumes premium payments, and collects the death benefit after the insured passes away. Unlike a standard life settlement, the focus here is on providing immediate financial assistance to individuals with urgent medical or end-of-life expenses. For more details, visit our full Viatical Settlement Guide.
Eligibility for Viatical Settlements
To qualify for a viatical settlement, the policyholder must typically have a terminal illness with a life expectancy of two years or less. Medical documentation from a licensed physician is required to verify the diagnosis and estimated prognosis – eligible, provided they meet the policy’s minimum value requirements and are beyond the contestability period (usually two years from issue date).
How Viatical Settlements Work
The process of securing a viatical settlement begins with a confidential consultation with a licensed viatical settlement provider. Once eligibility is determined, the policyholder submits medical records and life insurance documentation for review. After underwriting and evaluation, an offer is made based on the policy’s value and the individual’s life expectancy. If accepted, the policy is legally transferred to the buyer, and the seller receives a lump sum payment — typically within a few weeks. The new owner then assumed responsibility for all future premiums.
Payout Ranges for Viatical Settlements
Payouts for viatical settlements are generally much higher than those for life settlements — often ranging between 50% to 85% of the policy’s face value. The closer the individual is to the estimated life expectancy threshold, the higher the payout tends to be. Because investors expect a shorter holding period before receiving the death benefit, they’re typically willing to pay more upfront. This makes viatical settlements a powerful financial tool for those in urgent need of support during a medical crisis.
Impact on Beneficiaries
When weighing the pros and cons of a life settlement vs a viatical settlement, it’s crucial to consider how each option affects your loved ones. Selling a life insurance policy can provide needed cash today, but it also changes the future financial support your beneficiaries were originally meant to receive.
Loss of Death Benefit
In both a life settlement and a viatical settlement, the policy’s death benefit is transferred to the purchasing investor. This means that once the sale is complete, your original beneficiaries — whether a spouse, children, or other loved ones – will no longer receive any payout when you pass away. This is one of the most significant trade-offs in the life settlement vs viatical settlement decision.
Financial Security Considerations
Before committing to either option, think carefully about the financial impact on your family. If your loved ones are depending on the policy’s payout for their future well-being, it may be worth exploring alternatives. However, in cases where immediate funds are needed–such as to cover medical expenses, pay off debts, or relieve financial stress–selling the policy might be the best decision. As you compare life settlement vs viatical settlement, take time to assess how each choice aligns with your long-term legacy goals.
Seeking Professional Assistance
Understanding the differences between a life settlement and a viatical settlement can be complex, and the financial stakes are high. That’s why seeking expert advice isn’t just helpful – it’s essential.
Importance of Consulting
Whether you’re evaluating a policy for retirement purposes or facing a medical crisis, consult with professionals who specialize in life insurance settlements. Financial advisors, tax experts, and licensed brokers can explain the nuances of life settlement vs viatical settlement, offer a personalized analysis, and help ensure you’re making the most financially sound decision.
Choosing a Settlement Provider
Working with the right provider is just as important as choosing between a life settlement vs viatical settlement. Look for licensed providers with a transparent, client-first approach. A reputable settlement company will walk you through each step, answer your questions clearly, and help you receive a fair and timely offer. The right partner can make this process easier, safer, and ultimately more beneficial for you and your family.
Conclusion
Choosing between a life settlement vs viatical settlement is a deeply personal decision — one that depends on your health, financial goals, and the needs of your beneficiaries. While both options allow you to access the value of your life insurance policy before death, they serve different purposes and offer different benefits.
Life settlements are typically a good fit for seniors looking to free up cash for retirement, while viatical settlements are intended for those facing a terminal illness who need financial relief now. In either case, understanding how the process works and its long-term impact is key to making the right choice.
To protect your financial future and make the most of your policy’s value, we strongly recommend consulting with experienced professionals. At Ovid, we’re here to help guide you through the process with care, transparency, and expert support.
