When you receive a viatical settlement, the funds are tax-free. In 1996, the Health Insurance Portability and Accountability Act (HIPAA) exempted viatical settlement proceeds from income and capital gains tax. Prior to the implementation of that law, viatical settlements were taxable. Now, you are able to get funds from your settlement without having to worry about paying taxes on it.

Taxation of Viatical Settlements

A viatical settlement is defined as the sale of a life insurance policy from an insured individual who has a life expectancy of 24 months or less to a viatical settlement company. While undergoing the viatical process, the company you’re working with will order a life expectancy report from a medical underwriting company. An individual’s life expectancy report is one of the main factors used to determine the offer for the policy which is why it’s an important part of the process. As long as you have this report or if your physician signs off stating you have a life expectancy of 24 months or less, the sale of your policy is treated as a viatical settlement and is free from taxation.

How to File Your Viatical During Tax Season

Although funds from the settlement are tax-free, it’s important to make sure the person handling your taxes is knowledgeable of viaticals and how to file them correctly. When working with your CPA or financial advisor, make sure you obtain a copy of the executed closing documents to provide them for tax season.  Then, they should be able to file your settlement in the appropriate manner so your funds are exempt from being taxed. For further information, you can also visit the Internal Revenue Service website to read more about how they classify the funds as tax-free for a viatical settlement.

Types of Cancer Financial Assistance that are Taxable

Although viatical settlements are not taxable, there are some other forms of cancer financial assistance that are subject to taxes. Be sure to keep this in mind when researching your options.

Settlements for Chronically Ill

When someone who is chronically ill receives a settlement on their life insurance policy, some of the proceeds may be taxable. As a general rule of thumb, chronically ill individuals can use the proceeds of their viatical settlement to cover long-term care services, and those amounts are not taxable. However, any leftover amounts may be subject to income tax.

Cash Surrender

If you have a whole life insurance policy, you may have considered surrendering your policy in exchange for its cash value. In most cases, a viatical settlement gives you more money than surrendering a life insurance policy for its cash value. On top of that, cash surrender amounts are taxable. These payments aren’t based on your illness and because of that, they aren’t tax free. To give you an example, let’s say that the cash surrender value is $50,000, and the viatical settlement offer is $80,000. Then, when you apply the tax, you have to pay $10,000 in tax on the cash surrender amount bringing it down to $40,000 and absolutely nothing on the viatical settlement. That makes the difference even larger.

Viatical Settlements Avoid Estate Tax

Finally, it’s important to consider that some life insurance payouts can trigger the estate tax. If you don’t take a viatical settlement and your life insurance pays out after your death, your beneficiaries don’t have to pay any income tax on the payout. However, the value of the life insurance settlement becomes part of your estate. As of 2018, if your estate is worth more than $11 million, you have to pay estate tax, and that tax may be applied to the amount of your life insurance settlement as well. Taking a viatical settlement upfront ensures that you avoid that tax.

To learn more about the benefits of viatical settlements, contact us directly by calling 877-421-0148. Our counselors are available to help you discover the best way to protect your finances and your family. If you’re ready to get started now, answer a few simple questions to instantly see if you qualify.

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