Viatical Settlement vs. Life Settlement - SmartAsset

The ins and outs of life insurance can be complex. That can be especially true if you want to sell your life insurance policy. There are two types of settlements: life settlements and viatical settlements. But when talking about viatical settlement vs. life settlement, which one do you choose? Let’s break down what each does and their main differences and go over additional options you may have. If this is a consideration for you then you may want to talk it over with a financial advisor before moving forward.

What Is a Life Settlement?

A life settlement is the sale of a life insurance policy, usually made to an investor in exchange for cash. The buyer of the policy becomes the policyholder and beneficiary, continuing to make payments until the original owner (the seller) dies. Then the buyer collects the full death benefit.

To be eligible for a life settlement, most people must be 65 or older, have a policy of $100,000+ and have universal or whole life insurance. In general, life settlements are designed for healthy seniors.

Why Would You Choose a Life Settlement?

There are upsides and downsides to selling your life insurance policy in a life settlement. The downside is obvious: your beneficiaries — whether they be your children, spouse or someone else — won’t receive the death benefit. Plus, life settlements only payout 10% – 25% of the death benefit. So, if you had a policy worth $100,000, you could receive as little as $1o,000. That’s before taxes, because yes, the government will take its cut in the form of income tax.

The upside is that you immediately have cash. You could use this to pay off debts or live out the remainder of your life more comfortably.

What Is a Viatical Settlement?

A viatical settlement is the sale of a life insurance policy, in whole or in part, in exchange for cash. While it’s not technically required, most viatical settlements require the seller to be terminally ill, with a life expectancy of 2 years or less.

The payout of a viatical settlement is better than the cash surrender value of the policy, but not as good as the death benefit. In general, the more serious the health condition and the lower the life expectancy, the better the payout of a viatical settlement.

Why Would You Choose a Viatical Settlement?

If you have mounting debt, it might make sense to choose a viatical settlement. Chances are that your life may not be in the same place it was when you took out the life insurance initially. Your children, who you wanted to protect with a life insurance policy, may now be grown, financially stable adults. It may not be necessary to keep the insurance policy and if it alleviates your finances in your final years, a viatical settlement may be worth it to you.

Viatical Settlement Vs. Life Settlement: What’s the Difference?

There are a few key differences when talking about viatical settlement vs. life settlement. They are:

Medical requirements: To receive a viatical settlement, you will likely need to be diagnosed with a condition that comes with a short life expectancy. You will need to prove this with documentation. Life settlements aren’t as stringent and healthy seniors are often eligible.
Settlement amount: Life settlements typically pay 10% – 25% of the total death benefit. Viatical settlements are often much larger, paying 50% – 85%, depending on your life expectancy.
How they’re taxed: Life settlements are often taxed as taxable income. On the other hand, viatical settlements are usually not taxed.

Additional Options

Before considering a life insurance settlement, there are other options you should look into.

Accelerated death benefit: An accelerated death benefit is an additional life insurance rider that will let you tap into a portion of your death benefit while you’re still alive.
Borrow against your insurance policy: If you have permanent life insurance, you can borrow against your life insurance policy. This can be useful to pay down debt with a higher interest rate.
1035 exchange: If you want to change or upgrade your life insurance policy, a 1035 exchange will allow you to swap a like-kind policy tax-free.

The Bottom Line

If you need a lump sum of cash, you may consider a life insurance settlement. When it comes to viatical settlement vs. life settlement, life settlements are easier to get but come with a lower payout. Viatical settlements often require that you have a terminal illness, but will pay considerably more. But with both, your beneficiaries will no longer receive a death benefit, so weigh your options carefully.

Life Insurance Tips

Think you want a life insurance settlement? Consider talking to a financial advisor who can help answer questions or help you navigate the impact on all of your finances. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
One way to get an idea of how much life insurance you need is by using SmartAsset’s no-cost life insurance calculator.