Are viatical settlements taxable?

The short answer is no. 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.

But, there are a few details you should know to make sure you avoid any taxes on your viatical settlement. Read on to find out more.

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.

Blog feature image with a white book on a table with a gavel and a caption that says viatical taxationHow Viatical Settlement Taxation Works

A viatical settlement is defined as the sale of a life insurance policy (whole, universal, term, group) to a viatical settlement company from an insured individual who has a life expectancy of 24 months or less.

At American Life Fund, you can see if you qualify and get a free estimate in just a few minutes.

Then, 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 your viatical settlement 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 Settlement During Tax Season

Although funds from the settlement are tax-free, it’s important to ensure 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 viatical settlement closing documents to provide them for tax season.

Then, they should be able to file your settlement appropriately, so your funds are exempt from being taxed.

For further information, you can also visit the Internal Revenue Service website to learn more about how they classify the funds as tax-free for a viable settlement.

Types Of Cancer & Other Life-Threatening Illness Financial Assistance That ARE Taxable

A viatical settlement is based on the individual’s life expectancy rather than their specific illness or condition. For a viatical settlement to take place, the individual must be terminally ill and have a life expectancy of two years or less, as determined by a licensed physician.

This means that even if an individual has a cancer diagnosis and their life expectancy exceeds two years, a viatical settlement would not be possible. The same applies if an individual has a late-stage cancer diagnosis but has a good chance of survival or an effective treatment plan that extends their life expectancy beyond two years.

Settlements For The Chronically Ill Can Be Partially Taxed

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.

vaitical settlement tax guide

Life Insurance Cash Surrenders ARE Taxable

If you have a 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.

In the end, you’d get around $40,000 more with a viatical settlement.

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 won’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.

Still on the fence about a viatical settlement? See our comprehensive list of viatical settlement pros & cons.

save money with life insurance settlement using viatical settlement.jpg

Frequently Asked Questions About Viatical Settlement Taxation

Are Viatical Settlements Subject to Income Tax?

As of 1996, most viatical settlements are tax-free, with a few small stipulations for the chronically ill.

Who Pays The Premiums on a Viatical Settlement?

After you have closed your viatical settlement, the viatical settlement company (like us at American Life Fund) pays your premiums.

NOTE: See our articles on financial assistance for your life-threatening or chronic illness here:

About the Author: Lacey

Lacey is a compassionate and dedicated marketing director at American Life Fund, a leading life and viatical settlement company. Lacey has made it her mission to help patients with life-threatening illnesses and their families get the financial support they need during difficult times.

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