What is a Viatical Agreement?
A viatical agreement, also called a viatical settlement, is used when the owner of a life insurance policy is terminally ill and wants to receive a cash payment while he or she is alive, rather than having the death benefit paid to the insured’s beneficiary. The insured who sells his or her life insurance policy is called a viator and generally must have a life expectancy of less than two years, as certified by a physician. A viatical settlement is especially useful to the insured if he or she needs are large sum of money to pay for medical treatment or long term care.
In a viatical agreement, the third party purchaser of the life insurance policy pays the insured less than the death benefit under the policy. The third party purchaser also takes over paying the premiums on the policy. When the insured dies, the third party purchaser collects the death benefit.
Using a Viatical Settlement to Pay for Long Term Care
If an individual has received certification from a physician that he is unable to perform certain activities of daily living without assistance, that individual may qualify to exclude any taxable gain on the sale of a life insurance policy if the proceeds are used to pay for long term care. However, if the chronically ill person uses the proceeds for anything other than payment of long term care expenses, he must pay tax on any gain (the amount received from the sale of the policy less any premiums paid).
Receipt of a viatical settlement may affect your eligibility for government assistance, such as Medicaid. If you need to qualify for Medicaid to pay for long term care, consult an attorney with experience in Medicaid eligibility requirements for more information. See Medicaid planning.
The Complete Guide to Viatical and Life Settlements
Before deciding to sell your life insurance policy, read The Complete Life Settlements Handbook. This comprehensive guide to viatical and life settlements discusses all the factors to consider when making this decision, as well as problems that can arise when you settle a life policy.
The Complete Life Settlements Handbook also provides tips on how to select a viatical settlement broker and outlines other important considerations, such as taxes and alternatives to life settlements.
How to Decide Whether to Use a Viatical Settlement
If you own a life insurance policy, have been diagnosed with a chronic disease or terminal illness, and need cash, contact your life insurance provider to explore your options. Your life insurance policy may feature alternatives to a viatical settlement, such as an accelerated death benefit option, a loan against the cash value of your policy, or the option to cash out the policy based on its surrender value. After obtaining information from your life insurance company, consult a financial planner to determine if a viatical settlement is the best solution for your financial needs.
Before contacting a viatical broker or viatical settlement company, get information on the percentage payout you can expect to receive so you can negotiate the best terms when selling your policy.
Are Viatical Settlements Taxable?
If the insured has certification from a doctor that he or she is expected to die within 24 months, the proceeds received by the insured from the sale of the life insurance policy may be exempt from federal income tax. However, not all states exempt viatical settlements from state income tax. The proceeds of a viatical settlement may also be subject to estate tax. Check with your tax advisor before accepting a viatical settlement.
The third party purchaser of the life insurance policy from the insured is not exempt from federal income tax on the proceeds of the policy. The life insurance proceeds received by the viatical settlement provider are subject to ordinary income tax.
How to Find a Viatical Settlement Provider
Most states require viatical settlement providers to be licensed by the state department of insurance. Some states also require viatical settlement companies and viatical brokers to be licensed by the state securities commission. To find a licensed viatical broker or viatical settlement provider in your state, visit the website of your state department of insurance. Do your research to ensure you deal with a legitimate viatical settlement company.
. This comprehensive guide to viatical and life settlements discusses all the factors to consider when making this decision, as well as problems that can arise when you settle a life policy.